BOI: No mandatory tax filing until technology gets up to speed

Bank of Israel recommends only forcing citizens to file tax returns once an easier and simpler technology to do so has been developed.

Karnit Flug 370 (photo credit: REUTERS)
Karnit Flug 370
(photo credit: REUTERS)
The Bank of Israel on Wednesday said Israel should only consider forcing its citizens to file tax returns if it can put in place technology to make the process simple and easy.
Currently, only companies and self-employed individuals must file returns, while regular working Israelis are exempted. The Israel Tax Authority relies on employers to automatically pay out taxes from each pay check, a method used in about half of the OECD countries. The rationale for requiring individuals to file their own taxes is that it could increase flexibility in tax policy and potentially combat tax evasion.
“If it becomes clear that the tool is effective, and the government decides to institute general reporting, it should be implemented in an advanced method that takes full advantage of up-to-date technological possibilities – the prefilled tax-return method,” reads an excerpt from the forthcoming annual report released Wednesday.
Tax filings are costly and burdensome, both to citizens and the government. In the United States, the average person devoted 14 hours to filling out their annual tax return – time that is not devoted to productivity or leisure, the report said. From the government’s perspective, it needs to put extra resources into filing, processing and auditing them for fraud.
To reduce those costs, the central bank recommended the use of prefilled tax returns, already used to some extent in 13 OECD countries. When done that way, the government creates a central database to put together each person’s return using financial information from a multitude of sources. The only thing regular people have to do is look over the return and either correct or approve it.
Putting together that database and creating a user-friendly system for prefilled returns would be expensive but necessary if the government wants to impose annual filings, the report said.
Until all that technology is in place, “the imposition of a tax-return filing obligation on employees through a nonautomatic method will be a heavy burden on individuals and will lead to increased expenditure by the Israel Tax Authority,” it said.
The report laid out advantages and disadvantages of forcing citizens to file taxes (as individuals or families) as countries including the US, Canada, France and Denmark do.
One reason for mandating annual filing would be to give the ITA more flexibility.
Currently, Israel’s tax code taxes income from every source differently and grants benefits through the employer. If taxes were filed by individuals, the government could change that system to reach certain policy goals.
“Among the possible changes are altering the progressiveness of the tax system by instituting integrated taxation, expanding the policy of supporting working parents by deducting from taxable income child-care expenses that are actually paid, increasing the efficiency of the earned-income tax credit by adjusting the credit amount to family income and increasing the encouragement of professional development by deducting from taxable income the precise costs of academic and professional studies,” the report said.
In addition to giving the government more flexibility in policy, the main upside of a central database (and of individual filing) is that it can help the government rein in the shadow economy, which a 2013 report by Visa estimated at NIS 185 billion, or 18.9 percent of GDP.
The central bank remained noncommittal that it would be an effective tool, noting that there was no difference in the size of shadow economies among countries with or without filing obligations.
It also found no evidence that automatic filing would encourage greater compliance with tax laws.