Why Tax Authorities Don't Want Israelis to Get What They Deserve

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Most of these Israelis don't file returns. Credit: Omer Hecht

Amid the flutter about rabbis with hundreds of millions in untaxed assets and tax inspectors scared to crack down on criminals, no one seems to have noticed an interesting passage from last week’s report by the state comptroller.

“Imposing a general [tax] reporting requirement in Israel would reduce government revenues because citizens would be entitled to refunds they hitherto had not sought,” the comptroller said.

In other words, policy makers at the Finance Ministry and Tax Authority, like those at the Bank of Israel and the National Insurance Institute, aren’t keen to give back money that taxpayers are entitled to.

They worry that if people are required to file tax returns — not just the self-employed but wage earners — they're likely to discover they've been overpaying.

But this isn’t the only reason cited in the report for opposition to universal tax filing. Policy makers are also concerned about the cost of setting up a government apparatus to deal with the problem. According to this argument, universal reporting alone wouldn't reduce tax evasion, it would merely increase friction between taxpayers and the tax authorities. 

In the state comptroller’s report, policy makers also say they don’t want to burden the people with filling out forms and dealing with accountants, lawyers and tax inspectors.

So on the one hand policy makers don’t want to trouble the public, while on the other they don’t want to give the public money back it may deserve. And which public is that?

If it were the upper 10% of income earners, the ones with batteries of tax experts at their disposal, officials wouldn’t be concerned about universal tax filing. Taxpayers with accountants and lawyers at their call can get back the money they are entitled to.

Sure enough, while policy makers are opposed to universal filing, tax experts are largely in favor.

Last week, the state comptroller joined their ranks. “There is room for a reexamination of this important matter with the aim of aspiring to increase as much as possible the numbers of people reporting their income to the tax authorities, expand government revenue and ensure social justice,” Joseph Shapira wrote in the report.

Shapira said there is value in universal tax filing, currently the practice in five countries belonging to the Organization for Economic Cooperation and Development — the United States, Canada, Greece, Poland and Hungary.

It would make the process of determining who should (or shouldn’t) be receiving allowances more efficient. It would make it easier for wage earners to utilize deductible expenses and tax credits. It would increase compliance with tax laws and reduce the amount of unreported income, conveying a positive message about the need for everyone to pay their fair share.

But after such a critical report on the Tax Authority, which showed how the authorities are handcuffed when dealing with criminal organizations, rabbis and tycoons, it’s hard to see how universal tax filing will provide a positive message.

It was interesting to hear the treasury’s response to the comptroller’s report. Mickey Levy, the deputy finance minister, said the Tax Authority was having enough trouble recruiting staff to deal with the limited number of tax returns it’s already receiving.

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