Angry, Unhappy Citizens Evade More Taxes, Says Professor

The social protests help explain why Israel has such a large black market, Avichai Snir explains

The public's dissatisfaction with government services may be fueling Israel's black market, according to one researcher.

"The black market isn't new; people always have evaded taxes and they'll continue to do so. But when they're angry at the government and feel they're being screwed, they'll evade more," said Dr. Avichai Snir, who researches Israel's black market.

Dr. Avichai Snir
Eyal Toueg

The socioeconomic protests that broke out over the summer cast a new light on the black market. If once the subject came up primarily in criminal contexts, now the discussion is about how it relates to equality, social justice and the cost of living.

"In places where people are pleased with the social services the government is providing, such as in northern Europe, they evade less tax," said Snir, an economist at the Netanya Academic College and the Ariel University Center of Samaria. "The social protests proved that people aren't satisfied here, and that explains at least in part why people are doing more business off the books."

Due to the nature of things, it's difficult to determine the exact size of any country's black market, notes Snir. Yet researchers found evidence that in Israel it increased from the equivalent of 16.3% of the GDP in 1990 to 21% in 2006, he said. And the most recently published figure, in a Bank of Israel report, indicates that the phenomenon has expanded even further to 23% in 2007.

That's significantly higher than the comparable figures in Germany (16.7%), Britain (13.2%), Japan (12.1%) and the United States (9%).

The government took steps to reduce the black market's scope over the past two decades, such as keeping out Palestinian labor migrants, reducing tax rates and limiting banks' ability to help customers launder money. But despite these steps, the black market is only expanding, said Snir.

While it's hard to say exactly why, "I have no doubt that one of the reasons is the decreasing quality of government services," he said. Taxpayers' feeling that they're not getting back their money in the form of decent government services does not create the phenomenon of off-the-books transactions, but it certainly reinforces it, said Snir.

The social protests followed a decade of increasing private expenditure on health and education. While this was nothing new for the upper classes, which had been paying for these services anyway, it was a significant change for the middle class. The lower classes, meanwhile, were forced to continue making do with what the government offered.

Thus the middle class, formerly accustomed to relying on government services, found itself facing a larger financial burden because the public-sector services were no longer enough. These are precisely the kinds of people motivated to evade taxes, said Snir.

In general, most tax evasion is by the middle class, he said.

"The top deciles don't evade taxes, because they don't need to. They employ accountants, lawyers and tax consultants in order to take advantage of legal loopholes and minimize their tax burden," he said. Anyone who can set up a private company to avoid taxes on his salary or buy a house in London in order to avoid Israeli taxes altogether doesn't need to resort to off-the-books transactions, he said.

"Most black-market money is among self-employed members of the middle class, particularly those who have a second job they're not declaring," said Snir. "A teacher who receives a paycheck from the Education Ministry probably won't be declaring additional income from giving private lessons, and you can't always blame him. There are enough barriers, mostly related to bureaucracy, that prevent him from doing so."

That doesn't mean tax evasion isn't happening at the corporate level, too, he said. These cases generally don't involve money at all.

"Businesses trade services," said Snir. "A manpower company may provide employees in exchange for computing services, a hotel may provide lodging in exchange for publicity. There are lots of examples, and furthermore, there are companies designed to enable these kinds of deals. No money changes hands, so no tax is paid, even though it should be."

The result of all this is that an estimated NIS 41 billion is missing from the official GDP figures, and NIS 10 billion is never reaching the Tax Authority.

There are several ways to address the problem. The first, of course, is increasing enforcement. As outgoing Tax Authority head Yehuda Nasradishi said, the authority could increase its revenues by NIS 1 billion if only it had another 200 employees.

Snir has additional recommendations. One is balancing the tax burden: If taxes are too high, that's an incentive to evade, but if they're too low, the government can't provide proper services. So it needs to ensure the right people are paying the right amount of taxes.

In addition, social norms need to change; these norms are part of what dictates whether people pay or don't pay.

The government, for its part, could improve its services and combat corruption. The more faith people have in the government, and the more they feel that the taxes they pay are reflected by the services they receive, the more they'll be inclined to bear their fair burden, said Snir.