As part of Minister of Finance Bezalel Smotrich's pledge to combat 'black money' through advanced technology, a group of businesspeople and former senior government official have proposed an intriguing, radical and surprising plan to tackle untaxed capital. They propose abolishing the NIS 200 bill completely (Israel's biggest bill) because vast amounts of 'black capital' are hoarded in the blue notes. Some of the assumptions might be overoptimistic but the plan could bring large amounts of money into the state coffers when it desperately needs it.
The policy paper proposes three main measures to combat black capital that could enrich the state coffers by nearly NIS 22 billion, as according to the Bank of Israel nearly 80% of the value of current bills are held by the public.
This is a surprising statistic because most capital transactions today are not conducted with large cash bills - but this is exactly the point. The cash is not used for payments but to hoard capital and frequently to evade tax.
According to a study by the European Central Bank based on data from 2008, only a third of the bills in the hands of the public were used for actual payments, and the rest as a form of hoarding capital.
It is not yet clear what is the likelihood of this proposal being implemented. The proposal was submitted on Thursday afternoon to senior officials at the Ministry of Finance, the Bank of Israel and the Prime Minister's Office, and they would certainly suit the long-term aims of the Israel Tax Authority to reduce the use of cash and report significant transactions. Just this week, a first arrest was made with the help of the Israel Invoices program of the Authority, for issuing fictitious invoices amounting to NIS 135 million, while avoiding paying NIS 20 million in taxes.
Uncovering tax evasion
"Most black capital is hidden by these bills," says Hisunim Finance chairman Adam Reuter, who signed the policy proposal together with Dr. Udi Levi, former head of Mossad's Economic Warfare Division, Noga Keinan, chair of the Business Heads Forum, Prof. Asher Tishler, former Dean of Tel Aviv University's Faculty of Management, Eden Bar Tal, former director general of the Ministry of Communications and chairman of the Second Channel Authority, former deputy Attorney General Adv. Raz Nizri, former Israel Securities Authority chairman Moshe Terri, engineer and entrepreneur Nurit Zeevi, and Eyal Ofer, an expert in money transfers in black economies.
It can be assumed that not all of the cash accumulated in NIS 200 bills has been used to evade tax, but probably a significant part of it has. Reuter says, "In a modern country, where there is a strong banking infrastructure, there is no reason for a business owner to hold a lot of cash because it makes him an easy target for robbery." Zeevi adds, "It can be assumed that the great majority of the cash that is not used for actual purchases is used for capital hoarding and tax evasion. In the end, people will buy a car, or an apartment with it or use it in some other way."
Therefore, they suggest, the NIS 200 bill should be completely abolished. The Bank of Israel would announce that in a short time these bills will be canceled and will no longer be able to be used as legal tender, and people holding them will need to go to a bank and exchange them for other bills, or deposit them in their bank account. According to the proposal, "The move would allow for a dramatic reduction in the amount of cash in circulation and would expose tax evaders, who would have to report them and pay the state's coffers in order to replace the funds, deposit them, or lose them."
The proposal stresses the importance of setting a very short schedule for exchanging or depositing the bills, "So as not to allow the bill holders to take preventative measures and to encourage them to participate in the Tax Authority's voluntary disclosure program as the only way to prevent the loss of their money."
Voluntary disclosure would be the next step in the plan they are proposing, which would allow those possessing large amounts of cash to deposit them immediately with "Immunity from criminal charges on failure to report income, and paying a reduced tax without penalties." Thus, says Reuter, "The handyman who has evaded taxes until now will be forced to stop hoarding cash, and will have both a stick and a carrot to start paying taxes legally."
Overoptimistic assessments
The proposal says, "Past experience shows that voluntary disclosure measures have reduced the desire of tax evaders to repeat the offense," so that tax payments are expected to increase regularly. In the future, the conditions for voluntary disclosure will become stricter, until there will be no choice but to get rid of all the NIS 200 bills. In this way, they believe, it will be possible to collect 75% of the black capital that is today hoarded in these bills.
However, this may be an overoptimistic assessment since capital can be hoarded in other ways, and even after the initial shock of canceling the NIS 200 bills, other bills or other ways to hoard the capital will be found. But in the long run, they aim to make Israel a "cashless country" in a way that will make tax evasion very difficult. According to Zeevi, "All the steps must be taken together to be effective. Otherwise the black capital will move from A to B."
Other complementary measures in the proposal include the expansion of the obligation to report to the authorities, the use of artificial intelligence tools and a ban on the use of cash substitutes, such as precious metals, on a significant scale.
But even if this is an optimistic calculation, and the measure will yield only a portion of the NIS 21.9 billion that the proposal claims could enter the state coffers, it is still money of an order of magnitude that could help narrow Israel's bloated fiscal deficit. According to Bar Tal, "The options are cuts that will suppress growth, or to do the right thing. And in the long run, this will make it possible to reduce the burden on those who pay taxes according to the law today."
The "war on black capital" has become a clichéd slogan for those who wish to avoid painful but necessary measures such as cutting government spending or raising taxes. But Smotrich has pledged that this time extensive professional work has been done, including with an advanced technological focus, which will make it possible to reduce tax evasion and bring more money into the state coffers. Now the burden of proof is on him.
Published by Globes, Israel business news - en.globes.co.il - on September 8, 2024.
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