Drubbed by Coronavirus, Small Israeli Businesses Demand Cash – and Shadow Economy Grows

The goal is to pay their expenses for the month and a half of no revenues, and the government is only expected to go after the real criminals

Sivan Klingbail
Sami Peretz
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A vendor wears a protective face mask at a hotdog stand in a fashion shopping center in Ashdod, May 5, 2020.
A vendor wears a protective face mask at a hotdog stand in a fashion shopping center in Ashdod, May 5, 2020. Credit: REUTERS/Amir Cohen
Sivan Klingbail
Sami Peretz

“I have no choice but to work for cash. I can’t pay taxes and I don’t intend to,” says B., who owns a deli that reopened last week. ‘I’ve been paying taxes for years, and what does the government do when I need something? It tells me to pay VAT for the months when I was closed. I haven’t gotten anything from the government.”

B. says it’s not just a lack of faith in the government that’s keeping him from recording his transactions. “I have no choice. I had a ton of expenses,” he says.

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“I had nearly no revenues. I have no other way to run the business. I need to pay suppliers. I need to pay rent. I need cash, now. I can’t split it with the government anymore.”

A flower seller was less outspoken but politely told TheMarker that he couldn’t accept credit cards. “Only cash. Sorry, the flowers are cheap – it’s all to create cash revenues so I can pay my expenses for the last month and a half,” he says.

“I can’t allow myself to give anything to the tax authority or the credit card clearing companies, which take a percentage of each sale. I’m out of money."

As in so many countries, the government shuttered large swaths of the economy to slow the spread of the coronavirus, triggering an expansion of the country’s shadow economy that’s currently estimated to be worth 20% of gross domestic product.

Businesses that typically obey the law but find themselves in financial straits are forced to violate the coronavirus restrictions and work without reporting transactions to the Israel Tax Authority.

Finance Minister Moshe Kahlon told the Health Ministry that hairdressers were making house calls without reporting taxes, citing this as a reason economic activity should be restored. Hairdressers and barbershops were then allowed to open.

Cash in 26% of transactions

Shadow economies generally develop when taxes are too high and the decision-makers aren’t fully trusted. Israel’s tax burden is slightly lower than the OECD average and is not considered an incentive to evade taxes. But the shuttered industries and government incentives that aren’t reaching all businesses are forming incentives for unreported economic activity.

A shop owner stands outside his open shop in Jerusalem on April 21, 2020.
A shop owner stands outside his open shop in Jerusalem on April 21, 2020.Credit: MENAHEM KAHANA / AFP

Draconian regulations can also increase the phenomenon, as Israel has seen in the past. Examples include the austerity period of the 1950s, the hyperinflation of the ‘80s and isolated instances such as the Tal Law that prevented yeshiva students from working if they delayed their army service, driving many to work under the table.

A Bank of Israel survey published last July showed that Israelis use cash for 26% of their purchases.

Respondents were asked how they preferred to pay; 79% said they preferred to pay tips in cash, 73% preferred to pay for taxi rides in cash, and 66% preferred cash for office services. Some 57% preferred cash for greengrocers at the market and convenience stores, 42% for purchases at other stores, 41% for lunch and 38% for service providers including lawyers and handymen.

Given how popular the use of cash already is, it could expand, making money laundering easier.

A., a personal trainer, says she has no choice but to hide her income. Her gym started hosting personal training sessions this week. This isn’t officially permitted yet, but she says she has no choice – she has no money to live on, let alone to pay for space at the gym.

She received nearly the maximum government grant for the self-employed – nearly 6,000 shekels ($1,710) – but that’s far from covering her expenses. She says she needs to take out more loans on top of what she has already borrowed, and believes that banks won’t be forthcoming.

“They told me that if my income didn’t decrease by [at least] 25% relative to last year, I’d needed to pay the money back,” she says. “I have no idea how much I earned last March or April. The only way to show that my income took a hit is to ensure that I have no income.”

When asked whether she’s afraid of getting caught or simply doing something wrong, she responded, “What choice do I have?”

Targeting the real exploiters

Israel’s incentives for businesses – grants and government-backed loans – are based on businesses’ reported incomes. Thus businesses that until now reported only part of their income will receive only partial compensation.

Tax authority chief Eran Yaacov appeared on television alongside a small business owner who said she hadn’t been compensated for her losses. A review of her case showed that she had indeed lost business but hadn’t fully reported her income until that point. As a result, she wouldn’t be receiving compensation.

As far as is known, the tax authority doesn’t intend to investigate people like A. or B. anytime soon. The authority is setting its sights on more serious tax evasion and individuals exploiting the crisis to earn easy money through sketchy loans, fraud or exploitative pricing of essentials such as masks.

As for the small business owners who are otherwise law-abiding citizens, the officials at the authority understand that the current situation is exceptional.

Meanwhile, with the gradual reopening of the economy, tens of thousands of people have returned to work, though no one has a real count. According to the National Insurance Institute, some 60,000 people who received unemployment benefits in March were back at work as of Tuesday.

The actual number, however, is believed to be closer to 100,000. Not everyone reported to the NII that they’ve returned to work, partly because not everyone was eligible for unemployment pay in the first place.

Avi Waksman contributed reporting.