Trajtenberg to Call for Crackdown on Shadow Economy

Israel's shadow economy is thought to be worth NIS 120 billion a year, although estimates vary widely due to the nature of the beast.

The Trajtenberg committee is expected to call for raising the country's revenues by cracking down on legal and illegal tax evasion.

This would be done by creating two new committees - one to fight the shadow economy, and another to tackle straw companies created by high-salaried employees in order to avoid paying National Insurance and health taxes.

Trajtenberg - Tomer Appelbaum - August 17 2011
Tomer Appelbaum

The first committee, targeting the shadow economy - the term for unreported economic activity - would be headed by outgoing Israel Tax Authority head Yehuda Nasradishi. Even a partial success on this front would bring in billions of shekels a year. Israel's shadow economy is thought to be worth NIS 120 billion a year, although estimates vary widely due to the nature of the beast.

The second committee will address companies set up by high-earning individuals primarily to avoid paying National Insurance and health taxes. This phenomenon became widespread after the ceiling on National Insurance and health tax payments doubled, and the Trajtenberg committee's recommendations to create higher income tax brackets for top earners may further fuel the trend.

In such a setup, the wage-earner has their company or clients pay their business rather than receiving a salary directly, and then pays 24% corporate tax. As long they don't withdraw money from the company, it is exempt from income, National Insurance and health taxes.

The committee headed by Prof. Manuel Trajtenberg has not yet decided whether to recommend freezing corporate tax rates at 24% for 2012, or increasing them to 25%. That extra 1% is worth NIS 800 million to the state. Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz object to increasing the corporate tax rate.

The committee is also expected to call for raising capital gains tax from 25% to 30% for controlling shareholders - defined as people who own more than 10% of a company's shares - and from 20% to 25% for everyone else.

In addition, it wants to create additional, higher income tax brackets. Currently, the top income tax bracket is 45%. A new bracket would set a 48% or 49% marginal tax rate for people who earn more than NIS 40,000 or NIS 50,000 a month.

It is also considering whether to implement a special 2% or 3% surtax on people with particularly high incomes of more than about NIS 1 million a year. Netanyahu and Steinitz object to this proposal.

In order to solve the housing crunch, the committee may try to convince institutional investors to use their billions of shekels to buy or lease state land at low prices, and to build affordable rental housing on that land. The institutionals would receive unprecedented tax benefits for participating.

The committee wants to strengthen the Antitrust Authority by boosting its workforce and making it an independent body. The Finance Ministry is refusing to fund the process.

Trajtenberg and company want the trustbuster to crack down on sectors including retail, food, finance and agriculture.