What Greece Can Learn From Israel About Tax Cheats

4 FEB 24, 2015 12:55 PM EST

 Bloombergview

By Stephen Mihm

Among the most closely watched commitments made by Greece to obtain a four-month extension of aid from its official creditors is a promise to overhaul its notoriously inefficient system of tax collection and administration.

Skeptics, particularly among the law-abiding citizens of other European countries who believe their tax euros will be wasted on the continued bailout of Greece, will have hard time buying this pledge.  

It has become an article of faith that Greece has a “culture” of tax fraud so entrenched and pervasive that it cannot be fixed. But naysayers may want to consider the case of another Mediterranean country that exhibited comparable levels of tax evasion yet managed to eradicate the problem: Israel.

The problems predated the formal creation of the Jewish State in 1948. Under British rule, Jews in Mandatory Palestine raised voluntary taxes to fund militias and help refugees fleeing Europe. But avoidance of British taxes was deemed acceptable.

As two scholars, Harold Wilkenfeld and Assaf Likhovski, have chronicled, this culture of non-compliance carried over to the newly created state of Israel. Although David Penkas, the chairman of the Knesset Finance Committee, proclaimed in 1950 that “we who had paid taxes to many foreign nations during our long years of Exile have now finally won the right to pay taxes to ourselves,” things turned out differently.

After the initial security threats subsided, Israelis began evading taxes en masse. One estimate from 1953 suggested that of 560,000 potential taxpayers, only 300,000 -- or a little more than half -- had registered with the Israeli Revenue. A separate report in 1956 estimated that 90 percent of employees paid their taxes, but only half the self-employed labor force did.

Israel at the time was flooded with refugees. Most immigrants, as an American adviser warned, “brought with them a deeply ingrained attitude to the effect that ‘the Government is our enemy.’”

The government responded in a rather arbitrary and coercive fashion, selectively intimidating specific classes of taxpayers.    Things went from bad to worse in 1954, after a prominent confectioner, Israel Sinai, committed suicide and left behind a note blaming the income tax for his death. Israelis went on a tax strike that year, prompting the government to form a commission to study the issue.

In ensuing years, Israel was able to solve the problem of tax evasion. It received a great deal of help from the International Monetary Fund and a multitude of U.S. advisers.

But much of the impetus for reform came from Israel itself, and its approach could serve as an example to Greece today.

First, the Israelis didn't shrink from increasing the penalties. In 1959, courts imposed the first prison sentence for tax evasion, and by 1960, Israel had one of the highest rates of criminal prosecution for tax fraud.

Yet much of the credit for the change in attitudes in Israel belongs with far more modest, even banal reforms that were more carrot than stick.

For example, authorities found it exceedingly difficult to determine how much tax people in certain occupations should pay, given that they rarely kept books or accounts. The solution was to create “standard assessment guides” known as tahshivim, which allowed all people in a given occupation to be taxed at the same rate.

These guides, notes Likhovski, were “perceived as a way to increase the objectivity of the tax assessment process and even to involve groups of taxpayers in it.”

This was part of a much broader strategy. Reformers sought to involve the taxpayers themselves in tax policy. For example, the Israel Revenue established advisory committees staffed by local business owners who had first-hand knowledge of area taxpayers. These committees were charged with hearing complaints about the assessments of taxes and could recommend a revision in a taxpayer’s favor.

At the same time, the Israel Revenue circumvented organizations that opposed its reforms. When it encountered resistance from trade unions or business groups, the government sent mass mailings explaining its position and the obligations of taxpayers.

To get buy-in from the public, reformers even redesigned tax offices. Previously, visits to the taxman meant sitting in large rooms with lots of other grumpy people. Unhappiness, the Israelis concluded, is contagious, and they moved to a system where taxpayers would wait alone for a government representative, with whom they would have a one-on-one meeting. They also self-consciously designed offices with an eye toward minimizing conflict. These featured pleasing pictures on the walls, comfortable chairs and a host of other modest modifications aimed at changing how taxpayers viewed tax collectors.

Such subtle interventions were bolstered by a huge public-relations campaign to change the attitude toward taxes. The government introduced lessons about taxation into the secondary school system, the armed forces and other institutions; it also flooded the country with pamphlets and advertising, and offered tours of tax offices.

The government sought to convey the sense that taxation wasn't an evil to be avoided, but the price of citizenship. It even built a museum of taxation (it so impressed U.S. officials that the Internal Revenue Service built one, too).  The government commissioned a short propaganda film ("The Tsippori Affair"), which followed the travails of a man who discovers that government ceases to function when he evades taxes.

By avoiding single-minded, heavy-handed interventions (as countries such as Argentina did, unsuccessfully) Israel fixed its problem. By the 1970s, tax evasion had largely disappeared, and Israel became an adviser to other countries struggling to collect taxes from their recalcitrant citizenry.

To contact the author on this story:

Stephen Mihm at smihm1@bloomberg.net

To contact the editor on this story:

Max Berley at mberley@bloomberg.net

http://www.bloombergview.com/articles/2015-02-24/what-greece-can-learn-from-israel-about-tax-cheats