Bank of Israel data released last week indicates that unreported money circulating in the economy cheats the Israeli Tax Authority out of about NIS 50 billion ($14 billion) a year.
According to financial daily Globes, the Bank of Israel estimates that the scope of this so-called shadow economy range from 20% to 25% of the gross domestic product, which translates into over NIS 200 billion ($56 billion).
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This amount to between NIS 40-50 billion ($11-$14 billion) in lost tax revenues – a sum nearly equal to budgets of the Defense, Health and Education ministries, the bank noted.
The report noted that regulators are trying to fight this phenomenon, which has a considerable impact on the Israeli economy, through stricter enforcement by the tax authorities, as well as through legislation such as the Reducing the Use of Cash Law, which restricts the use of cash between private individuals. Severe regulation on international transactions is also in place, barring banks from accepting unreported money.
Still, it seems that shadow economy cannot be eliminated altogether – only somewhat limited in scope.
The survey released last week by the Bank of Israel's Currency Department on the public's use of cash noted that "technology is making the use of cash unnecessary and the nature of the payments sector is changing rapidly" as new technologies for digital payment, such as mobile payment applications, digital checks, etc., are being introduced.
The central bank also cites the Reducing the Use of Cash Law, which went into effect on January 2019, as an instrument for restricting the use of cash.
Still, the survey found that cash is still a major tool in deals in Israel, accounting for 26% of total daily spending, compared with 38% of daily spending via credit or debit cards. Only 10% of respondents reported more than NIS 500 ($142) in daily cash spending. The true figure is believed to be much greater, indicating a significant volume of unreported cash transactions.
The central bank's poll fund three types of spending in which cash is preferred – tips (79%), taxicab rides (73%), and giving money to a relative (69%) – noting that these are considered "standard" cash items in an average household.
A position paper by the Committee to Examine Reducing the Use of Cash in Israel's Economy noted that the amount lost to shadow economy every year could be used to reduce value-added tax rates, which in 2019 were set at 17%. This, in turn, could be used for reducing the high cost of living.
"The damage to Israel's economy and society from a shadow economy of such major size does not end with the economic loss. The shadow economy negatively impacts social cohesion and national resilience and calls into question the legitimacy of the rule of law and government administration. It negatively impacts equality in general, and in equal sharing of the civic burden in particular," the paper said.
"Bearing of the responsibilities of citizenship, by each individual, is critical to the existence of a civil system. A state like Israel cannot accept these negative impacts. Therefore, the battle against the shadow economy is a strategic goal.
"Additionally ... the world is moving toward a cashless society. In a digital age, cash will have no significance. It is appropriate that in this issue as well, the State of Israel lead the process and enter the new age in a prepared and innovative manner," it said.
