'Cash is the fuel of the black economy'

In battle with shadow economy, Israel looking to cap cash payments

Tax evaders and their customers will be fined under legislation that outlaws paying in cash for anything costing NIS 8,000 ($2,300) or more, says tax authority chief

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Illustrative image of a suitcase full of cash (ungorf; iStock by Getty Images)
Illustrative image of a suitcase full of cash (ungorf; iStock by Getty Images)

Gardeners who don’t issue receipts for their yardwork. Homes and cars that are bought in cash. Private tutors and yoga instructors who take their fees under the table. All these create a shadow economy that is costing Israel billions of shekels in lost tax revenues.

Now, the state is fighting back, aiming to pass a law that will curb the use of cash. The law, which will limit cash payments to NIS 8,000 ($2,300), would fine not only the tax evaders but also their customers who agree to pay in cash for goods or services.

“I hope that by the end of March we will have the law in place in Israel,” said Moshe Asher, the head of the Israel Tax Authority, in an interview. “The law will, for the first time, punish citizens who pay in cash in large transactions. Cash is the fuel of the black economy.”

Those found giving or accepting payments of above NIS 8,000 in cash will be fined 30 percent of the value of the transaction, he said. Eventually, Asher said, the hope is that citizens will desist from paying even lower amounts in cash, as the cash culture changes over time.

Moshe Asher, Israel Tax Authority chief (Courtesy)

Customers will be encouraged to instead use credit cards, payment apps or electronic wallets, or bank transfers.

“We want to reduce the amount of cash so that large transactions are not in cash,” Asher said. “This will address the serious problem of black money in Israel. We have a significant problem of black money. People are selling goods and services and not reporting income.”

“Today it is legal to buy a house or car with cash,” he said. “But after this law is passed it won’t be.”

A law to this effect was proposed in the Knesset 2015 and passed its first of three readings, but is now stuck in the Constitution, Law and Justice Committee headed by Jewish Home lawmaker Nissan Slomiansky.

“It has not been advancing,” said Asher, noting that the Tax Authority is working with the budget department of the Finance Ministry to try to advance the law vis-a-vis Slomiansky.

The use of cash has been recognized globally as one of the main drivers of the black economy. A World Bank 2010 study put Israel’s shadow economy as a share of GDP at an average of 22% in 1999-2006. This was higher than Switzerland and the US, which both scored the lowest average of 8.6% for the same years, but lower than Italy’s 27% and Greece 27.3%.

Israel’s GDP in 2016 totaled some $350 billion, which means that according to the World Bank’s estimate, some $70 billion is undeclared. If taxes take some 30% of that amount, then Israel is losing out on $21 billion a year.

Shekel notes. (photo credit: Sophie Gordon/Flash 90)
Illustrative photo of shekel notes (photo credit: Sophie Gordon/Flash 90)

Cash facilitates tax evasion, money laundering, and various other offenses including the financing of terrorism, because it is anonymous and easy to conceal from the eyes of the authorities. Checks, like cash, enables money to move from one hand to another without being reported.

Having an extensive shadow economy “skews the shouldering of the public burden in a substantial manner, leading to high tax burdens on some portions of the population,” a Taub Center and Tel Aviv University paper on the shadow economy said.

Israel’s central bank is also mulling the launch of a digital shekel to wean the economy off the use of cash, a person familiar with the matter said in December.

“Law-abiding citizens should be part of the battle against black money,” Asher said. “People need to understand that paying taxes is not a punishment. It is a moral duty, and legal duty. If people want to benefit from government expenditures — infrastructure, hospitals — they have to pay for it. We are trying to get to the criminals and investigate them and in extreme cases jail them. In lighter cases we enact fines.”

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