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.
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
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