Thursday, December 7, 2006

High tax rates, alienation and black markets

I just returned from a PhD exam. The candidate presented some data that were startling and illuminating.

The study was concerned with the impact of new by-pass roads on smaller cities and towns, especially Arab settlements in Israel. As part of the study, Wafa presented official Israel Central Bureau of Statistics data concerning income levels by neighborhoods. She then declared that the data are unreliable. The numbers cannot reflect the actual income in the towns. The NIS 3,000 per month (some US$ 700) does not permit the housing and car ownership that she observed. It is noteworthy that the per capita GDP in Israel today places it among the richer countries of the world.

Wafa conducted an extensive survey and reported that most people interviewed were quite willing to report black market transactions of major proportions. Indeed, the real income seems to be four times the official income.

There is no doubt that black markets exist. However, their extent here is beyond what I would have expected, even in the high tax environment that we live in. The marginal tax rate on a professor's salary is above 50 per cent.

I suspect that part of the explanation of this phenomenon is related to alienation in light of the prolonged disregard by the government of the plight of marginal populations.

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