Background and objectives The relationship between population health and inequality in income distribution has attracted much attention during the last two decades. The purpose of this paper is to examine that relationship using Israeli time-series data, and considering three types of income: economic, pre-tax, and disposable. Methods Israeli time series (1979–2000) on life expectancy of men and women at birth and at ages 5 and 65, as well as infant mortality, were related to Gini coefficients measuring inequality in economic, pre-tax (after transfers) and disposable (after taxes) incomes, controlling for gross domestic product (GDP) per capita. This design allows for the estimation of the effects on population health of changes in income inequalities over time as well as of contemporaneous reduction in inequality due to transfers and taxes. Results None of the three income inequality measures by itself had an effect over time on population health. However, larger contemporaneous reductions in inequality, mainly through the transfers system, were associated with better population health, in particular with lower infant mortality. Conclusions A significant part of the temporal improvement in the health of the Israeli population has been due to the increasing effort to reduce inequality in economic income by increasing transfer payments. The results are generally inconsistent with the argument of adverse psychosocial effects of inequality on health, and are consistent with inequality being related to other harmful public goods affecting health and with Rodgers' argument.