The financing of Israel's massive public expenditure required heavy taxation, which its citizens had to bear, for years. This was one of the highest tax burdens in the world. During the first decade of statehood, taxes equaled one eighth of the GNP; in the 1960s, they reached one quarter; they wavered between 30 and 40 percent in the 1970s and 1980s; in the 1990s they averaged less than 40 percent, and were 40.3% in the year 2000. By 2003 Israelis' total tax burden decreased to 39.3% of the GDP, going further down to 31.5 percent by 2009 - well below the level of the OECD countries' average, which was 35 percent.
Indirect taxes consist primarily of a 16% Value Added Tax (VAT). In addition, a purchase tax is levied on cars, fuel, and cigarettes. Imports from the European Union and the United States are duty free, whereas customs are applied on imports from other countries.
Direct taxes on income and property amounted to less than one quarter of all tax revenues until the late 1950s, climbed to around one third by the early 1970s, then to about one half in the early 1980s, and reached 45 percent in 1986. Since then the weight of direct taxes decreased to 39 percent in 1995 and fluctuated between that and 42 percent in 2006.
In recent years, further changes to the tax system were adopted to integrate Israel more firmly into the global economy. As part of this policy, custom duties and purchase taxes on imports continue to decline, the corporate tax rate fell gradually to 25 percent by the year 2010 and is to fall to 18 percent by 2016. The marginal rate of income tax is also being gradually reduced to 42 percent in 2012 and 39 percent in 2016.