Featured Post

Expand the Tax Authority? Bad idea

Advice to Lapid: Toss out Treasury proposals to inflate tax revenue; First deflate our wildly bloated tax agency

Israel’s deficit, as our new Minister of Finance Yair Lapid called it in his blog last week, is “monstrous” – and growing. What Lapid has inherited, with the hope of controlling that monster, is the Treasury’s plan to expand tax revenue, among other schemes. It proposes to achieve that by increasing the Israel Tax Authority’s overall long-term budget and hiring. However, I would strongly suggest that our new finance minister conduct a careful examination of the Tax Authority’s organizational structure before taking such a step. What he will find is an inefficient system in need of a serious process of streamlining and possibly even merging with the National Insurance.

Drawing a comparison to the US system, for example, can help us understand how the Israel Tax Authority is far less efficient than its American parallel, the IRS.

ITA employs some 5,000 staffers, while the IRS has around 95,000. The cost per employee in the States is higher than in Israel – due to higher salaries and relatively high operational costs, resulting in an overall budget that is 35 times higher than the ITA budget. That said, the American economy is 80 times the size of the Israeli economy and the number of employees is 60 times more than in Israel. So, while out of 10,000 employees in the US only six work for the IRS, for every 10,000 employees in Israel, 20 are employed by the Tax Authority. In other words, the Israeli tax offices currently require more than three times the number of officials, indicating a lack of efficiency in ITA’s system.

Is this a fair comparison? It is true that the Israel Tax Authority not only handles direct taxation but also collects indirect taxes – mostly VAT and customs – which in the US system are collected by the states or by other agencies. But this factor alone is not enough to explain the enormous gap, especially considering that most of Israel’s ITA employees are not VAT or customs workers.

Data reveal that the IRS load is relatively higher than that of the ITA, because in the US almost every household is required to submit annual tax returns. In Israel, by contrast, only a small percentage of employees are required to submit an annual return. The ITA has traditionally objected to proposals to adopt a ‘universal’ reporting system in Israel as in the US, maintaining that this would require extensive manpower, which, it claims, the authority does not have.

Added to that is the fact that the US tax deduction system is much more extensive than in Israel. The US authorities are required to handle far more complex tax assessments than in Israel, as they must relate to a diverse system of allowed deductions on mortgage interest, childcare, health expenses, and the like, which are not applicable in Israel. The IRS is also responsible for national insurance payments (Social Security), whereas in Israel the National Insurance Institute and its employees are responsible for collecting those fees.

The natural conclusion is to expect that the Tax Authority ought to require relatively less manpower when compared to the United States tax system, and not the contrary. It seems that more in-depth and transparent public discourse is called for regarding the Israel Tax Authority’s intentions and efficiency – before additional budgets are allocated to the system.

About the Author
Professor Asher Blass is a former Chief Economist at the Bank of Israel, Owner & CEO of Economic Research & Consulting Group and a lecturer Ashkelon College