"Israel's black economy totals an estimated NIS 185 billion in 2013, 18.9% of the country's economic activity," states Visa Europe in a new study. The black economy's proportion of the total economy in Israel is similar to other Mediterranean countries (Italy, Spain, Portugal, Greece, and Turkey), but higher than in Western Europe, North America, and developed Asian countries.
According to Visa Europe, the main reasons encouraging Israelis to work in, and expand, the parallel economy are high tax rates, an unbalanced tax burden, administrative foot-dragging compared with other OECD countries, and insufficient financial inclusion of communities, such as Arabs and haredim (ultra-orthodox).
Israel's economic crisis, the budget deficit, austerity measures, and the erosion of the middle class may greatly reduce the government's efforts to contain the parallel economy. The Ministry of Finance and Israel Tax Authority are trying to get legislation passed, as part of the 2013 Economic Arrangements bill, which will reduce tax evasion and fight black capital in the markets. However, Visa Europe says that most resources should be used to reduce the use of cash.
Breaking the vicious circle of a cash economy requires cooperation by the government, banks, retailers, and payment systems. Priority should be given to measures and initiatives to reduce cash transactions and increase financial turnover.
Visa Europe Israel country manager Oded Salomy, "When using cash, it's easier to conceal income, but when using other means of payments, especially Visa credit cards, the chances of concealing income are greatly reduced. To reduce the black economy in Israel and increase the government tax receipts, we suggest taking measures which will increase the use of credit cards."
There were 134 electronic transactions per capita in Israel in 2011, of which 95 were credit card transactions. With an average of 0.77 credit cards per capita and 14 terminals per 1,000 people, instilling the use of electronic transactions is not a problem. Although Israel has a solid infrastructure, customers' use of electronic payments and installing them among merchants needs improvement, especially in rural areas.
According to Visa Europe, if electronic transactions increase by 10% per annum over the next two years, they can help to reduce the parallel economy to 17% of GDP in 2015, assuming that there are no major external shocks to the Israeli economy. It adds that the growth to date in credit card use has helped reduce the size of the parallel economy by NIS 16 billion since 2010.
Visa Europe estimates that at least 7% of the parallel economy can be eliminated by the use of electronic payments, with priority given to problem industries, such as diamonds, construction, and domestic help.
Published by Globes [online], Israel business news - www.globes-online.com - on June 25, 2013
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