Is the Tax System in Palestine Fair?

When the question of tax justice in Palestine arises, citizens do not concern themselves with percentages, legal provisions, or accounting complexities, but rather with a simpler and more direct question: Is what I pay in taxes proportional to my income? Does everyone pay according to their ability? And does what I contribute return to me in tangible services or economic security? From this perspective, one can say that the Palestinian tax system succeeds in revenue collection, but fails to build a general sense of justice and trust.

The problem is not the existence of taxes per se; they are a natural tool for financing any state, but rather the manner in which the tax burden is distributed. In practice, estimates based on labor market data and public revenues indicate that only about 20–25% of the workforce is subject to the regular income tax umbrella. This group primarily consists of public sector employees, formal private sector employees, and some compliant companies. In other words, less than a quarter of society bears the direct burden of financing the treasury, while everyone benefits from public spending and essential services.

This imbalance arises not only from weak individual compliance but also from an unbalanced economic structure. According to estimates from international institutions specializing in labor markets, the informal economy in Palestine constitutes between 35% and 45% of the Gross Domestic Product, absorbing a significant percentage of workers. These activities do not fall within the organized tax system, not necessarily due to deliberate evasion, but rather as a result of a lack of effective integration policies, complicated procedures, and weak incentives. The result is that the tax burden is placed on the easiest base to collect, not on the broader economic base.

The imbalance becomes more evident when looking at the composition of revenues. Indirect taxes, led by value-added tax, account for more than 65% of total tax revenues. This type of tax does not differentiate between rich and poor; everyone pays the same rate on consumption. Since low-income individuals spend most of their income on basic needs, the actual burden of these taxes falls disproportionately on them. Here, the tax loses its role as a tool for redistribution and becomes a daily living pressure.

Tax justice does not only mean rising rates on paper; it means that the system is capable of collecting without stifling economic activity and can expand without punishing the compliant. In the Palestinian reality, many tax compliant individuals feel that they are penalized for their compliance. Direct deductions from income, alongside ongoing audits and fines, create the impression that the system is stricter with those who comply and less effective with those who remain outside it. This message is dangerous, as it weakens the culture of voluntary compliance and turns the relationship between the citizen and the tax system into a relationship of fear rather than partnership.

More dangerously, there is a lack of a clear link between taxes and services. Citizens do not see tangible improvements in the quality of education, health, or infrastructure commensurate with what they pay. In the absence of this link, taxes transform from a contribution to the common good into a forced obligation. Over time, trust erodes, the willingness to comply decreases, and the prevailing question becomes: Why should I pay if I do not feel the return?

The middle class is the biggest loser in this equation. It does not benefit from social protection programs aimed at the weaker groups, nor does it have the tools for evasion or maneuvering. With the rising cost of living and the erosion of real incomes, taxes become an additional factor pushing this class towards contraction. This contraction affects not only the standard of living but also social and economic stability as a whole.

In this context, there is a need to think of different approaches to address the compliance gap. Some regional models have chosen to shift from a pure punitive logic to an incentive settlement logic, through partial and temporary exemptions from fines on outstanding cases in exchange for paying the principal due fees, and extending settlement periods to encourage reconciliations and end accumulated disputes. These approaches have not been presented as a concession to the rule of law, but as smart tools for actual revenue collection, expanding the base of compliant individuals, and reintegrating economic activities that have remained outside the system for years. Such models are not transferred literally but open a necessary discussion around the feasibility of incentivizing voluntary compliance instead of merely tightening collection on those who are already compliant.

The essential question then is not: Do we need more taxes? But rather: What kind of tax system do we want? Do we want an easy-to-collect system based on consumption because it is simpler, or a fair system that expands the tax base, eases the burden on low-income individuals, and redistributes the burden according to the actual ability to pay?

Real tax reform does not start with raising rates or tightening penalties, but with rebuilding the social contract. It starts with fairly expanding the tax base, reducing excessive reliance on indirect taxes, gradually integrating the informal economy without stifling it, and linking taxes to tangible services that citizens feel in their daily lives.

In the end, tax justice is not a theoretical luxury in a difficult economic context but a condition for social stability. A state that asks its citizens for compliance must first ensure that such compliance is distributed fairly and in exchange for service, and based on a partnership logic rather than mere collection. Without that, taxes will remain just numbers in the budget, with no real value in people's lives.