Ayala Tal - March 2012
A big part of the black market isn’t hard criminals peddling drugs but handymen and the like. Photo by Ayala Tal
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How big is Israel's shadow economy, which operates under the table and dodges tax? Israel has no official figures, and tax officials shrug that any number - NIS 50 billion, NIS 200 billion, take your pick - could be right. They claim that no serious studies of the black market have ever been done.

Yet one evidently has been - by the World Bank. Its findings were quoted in the Trajtenberg Report on the cost of living: Israel's actual economic activity in 2007 was 23% greater than reported economic activity, the World Bank said.

Israeli estimates of the size of the shadow economy range from 10% of gross domestic product to 25%. Israel's GDP in 2011 amounted to NIS 864 billion. Ergo, the size of the shadow economy is anywhere from NIS 86 billion at the lower end of the range to NIS 216 billion at the higher end. To put things into proportion, that's roughly one-third to two-thirds of the national budget.

Clearly, its dimensions are huge, and just how badly the shadow economy irks officialdom is clear from the fact that Finance Minister Yuval Steinitz is beefing up the Tax Authority with 750 new inspectors - a 14% increase - specifically to foil black-market activity. Or in other words, to increase the state's income from tax.

Some of this "black money" stays in Israel. Some is channeled overseas. Some gets laundered and returns to the legitimate business cycle.

Steinitz has quipped that if just 10% of Israel's shadow economy got exposed and started paying tax, Israel's financial problems would be over. He has a point: that 10% would work out to anywhere from NIS 8.6 billion and NIS 21.6 billion. That's how much more the government would have to spend each year. Alternatively, it could lower taxes.

Off-the-books income originates in three basic ways: criminal activity (rare ), petty dodging (such as a taxi driver or plumber asking for a flat fee and not printing an invoice - very common ), and the gray area of aggressive tax planning, which is becoming increasingly prevalent.

Working under the table - i.e., hiding income - is thought to be more common in the ultra-Orthodox and Arab communities.

Criminal activity that generates "black money" includes gambling, prostitution, gray-market loans, extortion, fraud and the like. Obviously, nobody living that life is going to file orderly tax returns, though serious criminals will have a legitimate cover business on which they do pay tax.

Moving onto the petty dodgers, some professions are naturals for evasion: private tutors, private health-care providers, handymen, taxi drivers, cleaners, nannies and the like. The sums per individual may be small, but since it's a national plague, they add up. Some believe the petty dodgers cost the state more in lost income than the major criminals. One reason for the sheer prevalence of the habit is lack of enforcement.

See you in 40 years

Aggressive tax planning is a different story. That is the province of big businesses who can invest in the best (and costliest ) accountants and lawyers, known for their skill at walking the fine line between minimizing the tax bill by legitimate means and diddling the state. Hence newspaper reports about negotiations between this or that company and the Tax Authority over a tax assessment, which can last years.

It doesn't help that, as former tax commissioner Yehuda Nasradishi confessed in a farewell interview four months ago, the Tax Authority doesn't have the resources to audit more than a tiny percent of tax returns. It does sample checks, he said.

In 2004, for instance, only 8.8% of the 520,000 tax returns filed for that year were audited. In 2010, the number was 2.4% of 840,000 tax returns. So if in 2004, the probability of a tax audit was once every 11 years, by 2010 the probability had reached once every 40 years. With figures like that, no wonder a known celebrity like Maccabi Tel Aviv basketball manager Moni Fanan (since deceased ) didn't even have a file at the Tax Authority.

Why doesn't the Tax Authority have more auditors? Primarily because the Finance Ministry (which is responsible for the authority ) has traditionally balked at hiring more, on the grounds that the cost to the state would be too high.

But the incumbent minister, Steinitz, and the present budget director at the Finance Ministry are cut from different cloth. Hence their decision to beef up the Tax Authority by 750 posts specifically to tackle the shadow economy.