(photo credit: Courtesy)
The tax authorities occasionally “raid” retail establishments in order to catch
tax evaders and deter future evasion. The forays of these “tax commandos” serve
an additional function: they give some estimate of the size of the black market
– that elusive, unreported part of national income.
newspaper reports, the conclusion was that approximately 25% of transactions in
Israel go unreported.
How reliable is this figure? On the one had it
could be an underestimate.
The tax authorities concentrate their efforts
on businesses they suspect to have a high rate of tax evasion. Or it
could be an
overestimate. The entire investigation checked only legitimate
doesn’t relate to businesses which are completely black.
studies have come up with very similar estimates: the black or
in Israel is around a quarter of GDP. (Compared to around 10% for the US
over 60% for our neighbor Egypt.) In a way that’s good news.
official figures give Israel’s GDP per capita at around $27,000, perhaps
closer to that of Spain at $32,000. (Pretty unlikely given that Spain is
thought to have a large black market.) But it is bad news for the tax
The black market means that the tax burden is spread very inequitably
the legitimate businesses and workers that are paying very high taxes
evading ones that are paying very little. It also means that the total
lower and the deficit more threatening.
The latest investigation provides
a good basis to discuss the complex relationship between enforcement and
collections in national taxation.
The efficiency of tax collection can be
gauged by the fraction of collection costs to total taxes collected.
fraction varies very widely by country.
The US traditionally has had the
lowest rate; a recent paper by Pinar Yesin showed that the US spends
50 cents to collect a hundred dollars in revenue. In Israel it is still
relatively low – a little over 1%. In Australia the number is around 3%
We would expect that the greater the resources spent on
enforcement, the smaller the black market would be. Yet the results seem
According to Yesin’s paper, Turkey is estimated to have a much
larger black market than Australia, and Australia’s is larger than that
US. It would seem that cause and effect here are reversed: the size of
market is caused mostly by cultural factors, not by actions of the tax
authorities, and the more tax evasion there is, the more it costs to
taxes. It is sometimes supposed that there is even a counterproductive
collection actions: aggressive collection actions can lead to an
mentality between citizen and government which can encourage tax
The Tax Authority in Israel has apparently been sensitive to
Alongside collections actions like the recent tax raid, they
also undertook last year a public relations campaign to explain to the
the importance and legitimacy of paying taxes. Time will tell if this
two-pronged effort to motivate compliance and punish evasion will lead
reduction in the size of Israel’s black market and a more equitable
the tax burden among Israeli citizens and businesses.