How can the shadow economy in Israel be measured? The answer is that it can't - not precisely, but it is obviously extensive. Estimates of the shadow economy range from 20% to 25% of GDP. That comes to over NIS 200 billion, which makes the state's loss in tax revenues NIS 40-50 billion.

Too much money circulates in the economy without a single shekel being collected in direct taxes (the money is taxed indirectly through VAT and fuel excise taxes, for example). This huge shadow economy is obviously not taken into account in studies, because it is undeclared. Nevertheless, it is unfortunately a normative practice from which people do not recoil.

Regulation tries to combat this phenomenon through stricter enforcement by the tax authorities, with some success; through legislation such as the Reducing the Use of Cash Law, which restricts the use of cash between private individuals; and strict international regulation that bars banks from accepting unreported money. Nevertheless, the shadow economy cannot be eliminated. It can be limited, but the task is a Sisyphean one. Contrary to what many people think, it is not confined to home renovators and other service providers. Criminal and drug organizations launder huge amounts of unreported capital through various means.

How do we know that the shadow economy in Israel is alive and well? First of all, from reports by the Israel Tax Authority about tax evaders whom it has caught. Secondly, and astonishingly, from surveys. It is true that surveys should be taken with a pinch of salt, but they are another measuring tool for attempting to track the shadow economy in Israel.

The Bank of Israel this week published a section of the annual survey by its Currency Department of the public's use of cash. Technology is making the use of cash unnecessary, and the Bank of Israel's report says so. The payments sector is changing rapidly, and new technologies for digital payment are being developed. Examples of new services that have been added and expanded in recent years include payment apps on mobile phones, digital checks, and debit cards. The Bank of Israel also cites the Reducing the Use of Cash Law, which went into effect in January 2019, as a tool restricting the use of cash.

At the same time, see what happens with a survey conducted by the Bank of Israel (a survey customarily conducted by central banks all over the world). The survey is designed to obtain an estimate of the proportion of cash spending by the Israeli public in comparison with spending through other means of payment, segmented according to types of spending. The survey findings indicate that cash is still a major tool in deals in Israel, accounting for 26% of total daily spending, compared with 38% using credit or debit cards. Median daily cash spending is NIS 46. According to the Bank of Israel, "only" 10% reported more than NIS 460 in daily cash spending. In my opinion, this "only" is misleading, because if 10% reported using over NIS 460 a day in cash, the true figure is much greater, which definitely indicates a dramatic volume of unreported money in Israel.

According to the survey, the three types of spending in which cash is preferred are tips (79%), taxicab rides (73%), and giving money to a relative (69%). These are really the "standard" cash spending items in an average household. Other cash spending should be noted, however: 47% prefer to pay a private doctor in cash. Whey should someone pay a private doctor a payment of NIS 1,000 or more in cash? For a very simple reason - to avoid paying VAT and to launder unreported money (by both sides of the transaction). Let us not be naïve. This is a common practice, and even if it conducted through an invoice that includes VAT, the cash paid is usually unreported money.

Another interesting finding in the survey is that 41% of the respondents prefer to pay for lunch at a restaurant in cash. Restaurants are indeed an extremely common stool for laundering unreported money. We can take comfort in the fact that at least VAT is being paid on this (if the business is not concealing part of its income) - poor comfort, indeed.

Published by Globes, Israel business news - en.globes.co.il - on July 28, 2019

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