Nearly 40% of Young Israelis Prefer to Pay Off-the-books, Tax Evasion Survey Finds

Recent poll conducted on behalf of TheMarker shows that tax evasion in Israel is a problem of norms; close to half of taxpayers say high tax burden is what motivates tax evasion.

The first question in a tax evasion survey conducted by the Dialog Polling Institute on behalf of TheMarker recently was a simple financial one: "An electrician who does work at your home offers you two payment options: NIS 500 in cash and without a receipt or NIS 585 on the books and including a receipt. Which option would you choose?"

Close to 40 percent of survey respondents in the 18- to 34-year-old group said that they preferred the first, cheaper and illegal, payment option. In contrast, 76 percent of adults aged 65 and up responded that they would prefer the legal payment option.

Almost three months have passed since the Tax Authority declared its all-out war on the black market economy and tax evasion. The large enforcement operation includes a hotline for reporting tax evaders and has caused genuine fear among some business owners and service providers, but it's unclear if the worries are justified. According to the survey results, there is a firmly rooted norm in Israel of tolerating tax evaders. Whoever thought that enforcement and deterrence would be enough is now discovering the depth of the problem, which is most conspicuous among the younger generation.

"I still remember the period when I worked at the Tax Authority – the general atmosphere that turned tax evasion almost into a national sport, and until this day we haven't succeeded in eradicating this plague," says attorney Kobi Cohen, a taxation expert and former senior Tax Authority official.

"As long as paying your taxes isn't recognized as an important value in the educational system and schoolchildren don't understand that it is in fact theft from the state coffers, it will be very difficult to engrain the importance of payment."

The authority's biggest enforcement campaign to date has been accompanied by an ad campaign with the tagline "Tax evasion is everyone's problem." It seems that the ad campaign, appearing amid the broader public discussion regarding the cost of living and equal sharing of the civic burden, has woken some members of the public. The tax evasion reporting hotline has received close to 12,000 reports from citizens since it was opened.

Another question in the survey asked respondents to what extent they agree that tax evasion constitutes stealing from the government. Some 36 percent of respondents between the ages of 18 and 34 rejected this assertion, compared to 14 percent of respondents between the ages of 55 and 64 and 22 percent of respondents above the age of 65.

"If the first survey question had taken a large amount and not NIS 500, I'm confident that the results would be different," says accountant Ofer Alkalay, a partner in the accounting firm Alkalay Monarov that specializes in fraud investigations, tax evasion and money laundering. "The larger the sum, the greater the temptation to evade taxes."

Alkalay believes that the survey results provided a charitable view of public opinion, and that the real level of tolerance for large-scale tax evasion is significantly larger.

"For years, until the Money Laundering Law was passed, Israel was a money-laundering paradise," says Alkalay. "There are entire sectors of the population in Israel that don't pay taxes due to a lack of enforcement. You see people who don't report their income and travel in a luxury car. You see a procession of Middle Eastern-style singers heading to the Tax Authority offices to be investigated. Has that lead to anything? When was the last time you saw a wedding singer provide an invoice? And even if they provide an invoice, most of the time it is for half the real amount. This phenomenon will continue and accelerate, certainly now that the tax burden is expected to increase. As much as you squeeze people, their desire to pay tax drops."

What are the public's reasons for evading taxes? The survey respondents don't perceive tax evasion as invalid social norm as a result of defective education or the lack of effective tax enforcement. Some 36 percent of respondents said that the key factor motivating tax evasion is the high tax burden. Moreover, 47 percent of respondents between the ages of 45 and 54 stated the size of the tax burden was the primary reason for tax evasion. And 13 percent of respondents pointed to another reason as a major factor behind tax evasions: the unequal distribution of resources in Israel, something that frustrates taxpayers.

The results of the Tax Authority's enforcement campaign will be put to the test at the end of 2013 and in the following two years. However, even the most optimistic people know that the path to change is a long one. According to recently updated figures, 16,000 tax cases are being adjudicated in Israeli courts over a sum equivalent to NIS 16 billion. According to figures published by the World Bank in 2010, the true size of Israel's annual economic activity is 23 percent larger than what is officially reported – a figure much larger than that of most major developed countries such as Germany (17 percent), the United Kingdom (13 percent), Japan (12 percent) and the United States (9 percent).