The article analyses factors constraining the capacity of the Palestinian National Authority (PNA) to raise domestic tax revenue during the period 1994–2000. The article shows that more than any other factor, Israel represented a constraint on the PNA's tax policies and revenue collection. Israel collected the bulk of taxes on traded goods on behalf of the PNA, and until 2000 a large share of income tax came from Palestinians working in Israel. By withholding revenue collected on behalf of the PNA, Israel was able to exert substantial financial pressure on the PNA. However, within its restricted room of manoeuvre, the PNA managed to raise significant domestic revenues subject to the constraint of consolidating and maintaining its power. The PNA also used the tax system as a means of enhancing rents from industries and sectors that the leadership believed were important for economic development, and to grant generous tax exemptions to politically important stakeholders.