shekel versus dollar 370.
(photo credit: REUTERS)
Amounting to an estimated NIS 185 billion, Israel’s shadow economy will reach
18.9 percent of its GDP in 2013, a study by credit card company Visa revealed on
The study defined the shadow economy as unreported or
under-reported transactions in the legal economy, excluding illicit activities
such as drug-dealing.
The 18.9% figure puts Israel on par with the
European Union as a whole, but somewhat ahead of the OECD average, which stood
at just 15.3%.
While countries like Turkey and Bulgaria had higher rates
(27 and 31, respectively), the shadow economies in North America were
significantly lower, said Justin Krampe, a senior consultant at ATKearney, which
carried out the study. In the United States, it was just 7% of
Unreported transactions mean lower tax revenues for the government,
unfair competition in the market, and a lack of protection for involved workers,
Krampe said. During times of economic distress, however, activity in the shadow
economy could also act as an economic stimulus because it helps shield people
from taxes. Plus, money spent in the dark eventually makes its way into the rest
of the economy.
That said, bringing more of the shadow economy into the
light could help the country with its deficit problem; just a 2 percentage point
drop in the shadow economy’s size could mean about NIS 9 billion more for the
government, Krampe said.
According to the report, the drivers of the
shadow economy in Israel include relatively high tax levels, an unevenly
distributed tax burden, high amounts of bureaucratic redtape and insufficient
financial inclusion of minorities, such as Israeli Arabs and Orthodox
While some of Israel’s shadow economy included household
transactions like undeclared payments to nannies, nurses, house-cleaners and
tutors, most of it came from businesses.
Manufacturing (including the
diamond business), construction, and car dealerships and garages were among the
greatest sources of unreported transactions.
Visa’s solution to the
shadow economy, of course, was to encourage more electronic
“Cash is the fuel of the shadow economy. It’s the
only way to work off the books,” Krampe said. “When you use cash, it’s easier to
Oded Salomy, Visa Europe Country Manager in Israel added,
“In order to reduce the shadow economy in Israel and increase government tax
revenue, we propose to take steps to increase the use of payment
Increasing electronic payments by 10% could help reduce the
shadow economy 4-6%, the study estimated.
To help steer more economic
transactions away from cash, Visa recommended several policy
Among them: increasing the amount of terminals that could
process electronic payments in places that don’t have them, such as small shops
and taxi cabs; offering a VAT discount for electronic transactions, setting a
requirement threshold for transactions, so that large transactions would by law
have to be carried out electronically; and developing mobile and other wireless