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We cannot call it reparations or compensation, so let us call it a peace tax instead: a 1 percent increase in income and value added tax in an Israeli economy of more than $500 billion would go a long way toward making the Palestinian state a reality. But there is much more to it.

The idea is that Israel should make a direct contribution to help the Palestinians until they realize their own successful state institutions and develop their economy. But it is also more than that. Making it in the form of a peace tax has symbolism, because every Israeli citizen would be contributing to it with their every transaction and every tax return.

The money would go from the people of Israel to the people of Palestine. Such a generous initiative would help heal the wounds and turn the page. Two states living side by side in peace is not something outsiders can impose; they both have to want it and work for it. This intangible aspect is much stronger than anything money can buy.

All this may sound far-fetched in the present circumstances, but we must look beyond them. Elon Musk suggested something similar in conversation with Lex Fridman of The New York Times soon after the Gaza war started. He explained that Hamas did not expect a military victory over Israel on Oct. 7, the goal was to provoke an overreaction.

Hamas wanted to commit the worst atrocities it could to provoke the most aggressive response possible from Israel and then leverage that aggressive response, and the outrage that it generated, to rally worldwide support for it and condemnation of Israel, which it succeeded in doing.

The world watched in horror as Gaza burned and, with each image, Hamas’ narrative grew stronger. Musk then suggested that the counterintuitive reaction from Israel would be to not fall into that trap. To counter Hamas’ strategy, Israel should respond with “the most conspicuous acts of kindness possible.” The antidote to provocation is not escalation, which is what Hamas wanted, but generosity, building confidence and investing in the future, not taking revenge for the past.

There is a definite moral dimension too. I cannot imagine that anyone can deny that Israel’s latest Gaza war raises serious moral concerns that will hit deeply into the collective conscience. Historian Yuval Noah Harari recommends changing the narrative of victimhood for both Israelis and Palestinians because describing yourself as a victim absolves you of any responsibility.

The peace dividend in terms of defense spending will make a 1 percent peace tax seem very much worthwhile.

Nadim Shehadi

In a podcast with Yonit Levi and Jonathan Freedland, Hariri described the Gaza war as producing a “spiritual catastrophe for Judaism itself.” He claimed that the war and its effect on Israel could destroy 2,000 years of Jewish thinking and culture. Jews in the diaspora, Harari claims, cannot really disassociate themselves from what happened in Gaza because the way Israel behaves, to a certain extent, reflects on how Judaism is defined.

We have already seen such concerns from prominent supporters of Israel in the diaspora. There have been open letters from people like Charles Bronfman, a major philanthropist and co-founder of Birthright Israel.

Another from members of the Board of Deputies of British Jews published in the Financial Times said that “Israel’s soul is being ripped out,” and “what is happening is unbearable, but our Jewish values compel us to stand up and to speak out.” There have also been numerous petitions with thousands of signatories.

Depending on how it is calculated and implemented, the peace tax could raise as much as $3 billion to $4 billion a year and could have a finite period, such as 10 years. A special fund could be created to house the money generated and it could be run by independent trustees, including Israelis, Palestinians and members of both diasporas. The fund would also be open to the diaspora organizations that were prominent in building the state of Israel itself — now they can participate in building the other.

Over the two years of the Gaza war, Israeli defense spending rose significantly. It was up 65 percent in 2024. This brought military spending to more than 8 percent of gross domestic product. In the long run, the peace dividend in terms of defense spending will make a 1 percent peace tax seem very much worthwhile.

In past Israeli-Palestinian peace talks, the idea of compensation for hardship, refugeehood and property loss by Palestinians was one of the sticking points. Israel accepted the principle but not the idea that it should contribute itself. This was complicated by the political implications and the acknowledgment of responsibility, especially regarding its own narrative of the 1948 war.

Even though new historians like Benny Morris and Ilan Pappe have addressed the issue of responsibility, it could be avoided by providing compensation in part through the peace tax, rather than calling it reparations.

The Palestinian state is not hypothetical, it was declared by Yasser Arafat in 1988 in Algiers and has since been recognized by the vast majority of UN members, well before the recent moves by France, the UK and others.

The legal and diplomatic question is not whether Palestine exists, but whether Israel chooses to engage with it constructively. When UN member states voted for the Partition Plan for Palestine in 1948, they voted for sharing the land between two peoples. The Arab Peace Initiative of 2002 also makes the realization of a Palestinian state a condition for peace and normalization with Israel by members of both the Arab League and the Organization of Islamic Cooperation.

A peace tax as an Israeli contribution would also consolidate relations and cooperation with Arab states that are already committed to rebuilding Gaza and helping the Palestinian state, as well as to normalizing relations with Israel. It would be an important contribution with a major political impact on the region, especially now that a comprehensive peace is being considered. For two years, we have seen Israel at its worst — we now need to see it at its best.

• Nadim Shehadi is an economist and political adviser. X: @Confusezeus