High-tech employees pay six times more tax than the average worker
Israel’s high-tech workforce contributed $6.6 billion in income tax in 2021 despite making up just 7.7% of workers.
In 2021, employees in Israel’s high-tech sector contributed approximately NIS 23.8 billion ($6.6 billion) in income tax on their salaries, accounting for about 35% of the total income tax revenue from wages in the economy. They also paid NIS 14.3 billion ($4 billion) to the National Insurance Institute, representing 21% of total National Insurance revenue. Additionally, high-tech employees paid NIS 5.3 billion ($1.5 billion) in taxes from exercising stock options and shares, which constituted 35% of the state’s total income tax from non-salaried income.
These figures highlight the disproportionate tax burden carried by high-tech workers, who make up only 7.7% of Israel’s workforce but contribute four times their share in taxation. According to an analysis by the Chief Economist, the average tax payment of a high-tech employee is six times higher than that of workers in other sectors.
While the high-tech industry is widely recognized for its significant role in Israeli exports and economic growth, the Chief Economist’s analysis sheds light on the direct taxation of high-tech employees. Notably, 86% of the state's direct tax revenues from high-tech come from employees, compared to 66% in other industries. This discrepancy is largely due to the higher salaries in high-tech and the fact that many startups operate at a loss in their early years.
In 2021, Israeli high-tech companies collectively paid NIS 6.7 billion ($1.9 billion) in corporate tax, 12% of total corporate tax revenues, and just 14% of the state’s total tax revenue from the high-tech sector. Despite accounting for 15% of total business sales turnover and 21% of corporate profits, high-tech firms benefit from generous tax incentives under the Encouragement of Capital Investment Law, significantly reducing their corporate tax burden.
Within the sector, multinational tech companies stand out. They represent only 8% of all high-tech firms but account for one-third of the industry’s total turnover. These firms paid NIS 2.5 billion ($696 million) in corporate tax, 37% of all corporate tax collected from high-tech. Moreover, the 10 largest multinational companies alone contributed NIS 1.5 billion ($418 million), or 60% of total corporate tax payments from multinationals.
Multinational firms also play a key role in employment taxation. 25% of all high-tech workers are employed by multinational companies, but these employees receive 32% of total high-tech wages and contribute 36% of total high-tech income tax payments. In 2021, an employee at a multinational high-tech firm paid an average NIS 9,850 ($2,745) per month in income tax, compared to NIS 6,000 ($1,672) for an employee at a local high-tech company, reflecting a 39% tax gap.
Stock options and share-based compensation are another major tax factor in high-tech. Many employees receive equity as part of their compensation, benefiting from a 25% capital gains tax rate instead of the higher marginal income tax rate. In 2023, tax payments on capital gains in high-tech reached NIS 5.3 billion ($1.5 billion), suggesting that in 2021, high-tech employees gained around NIS 16 billion ($4.5 billion) from exercising stock options. This translates to an estimated NIS 5.3 billion ($1.5 billion) in foregone tax revenue due to preferential tax treatment.
An analysis by the Chief Economist examined the distribution of these stock option gains in 2021. Approximately 25,000 employees exercised options, with an average withdrawal of NIS 770,000 ($214,000) per employee. However, this figure is misleading: 59% of employees withdrew less than NIS 100,000 ($27,900), while 2,200 employees (9%) made profits exceeding NIS 1 million ($278,000). Among this top tier, the average windfall was NIS 7.14 million ($1.99 million) per employee.
