Economic Impact of High Taxes and Black Money in India

Introduction

• Objective: Discuss the eradication of black money in India under Prime Minister Modi.
• Key Question: Have measures like demonetization, GST reforms, and two Modi terms succeeded in eradicating black money?

Major Indicators of Black Money

1. Gold Smuggling:
   • Gold smuggled seized at Ahmedabad airport increased by 65% in FY24.
   • 180 CR rupees worth of gold seized.
2. Counterfeit Currency:
   • 102% increase in fake 500 rupee notes according to RBI.
3. Black Stock Market:
   • Average daily trading in the black stock market estimated at 0.7 lakh CR rupees.

Root Cause: High Taxes

• High taxes contribute to black economy, smuggling, and underworld activities.
• Historical Context: In the 1970s, India had a tax rate up to 93.5% beyond a certain income slab.
  • Led to massive black money generation and empowered the underworld (e.g., Dawood Ibrahim).
• Example Scenario:
  • Jamnadas (a businessman) & Dawood Ibrahim: Avoided taxes via underreporting property sales and cash transactions.
  • Consequences: Government loss in stamp duty and inability to tax real wealth.

Current Scenario: Stock Market (Dubba Trading)

• Dubba Trading: Trades outside official markets to avoid brokerage fees, SEBI charges, and taxes.
  • Example Scenario: Trader avoids high taxes and transaction fees via dubba trading agents.
• Impact: 70,000 crores worth of transactions happening daily in black market.

Theory: Trickle-Down Economics

• Ronald Reagan's Administration: Reduced income and corporate taxes dramatically.
  • Income Tax Cut: Highest slab reduced from 70% to 28%.
  • Corporate Tax Cut: Reduced from 48% to 34%.
  • Outcome: Intended to stimulate economic growth through increased spending and investment by individuals and corporations.
• Actual Results: Key Metrics:
  • Real GDP growth improved on average to 4.41% per year (1983-1989).
  • Unemployment reduced from 7.2% to 5.3% (1980-1988).
  • Inflation reduced from 13.9% to 1.5% (1987).
• Challenges:
  • Increased income inequality.
  • National debt increased from $712 billion to $2.41 trillion.
  • Increased trade deficit (import > export).

Lessons for India

1. Reducing Taxes without Hindering Government Revenue:
   • Fine balance needed to reduce black money and encourage legal economic activities.
2. Active Wealth Redistribution Policies:
   • E.g., Maharashtra reduced stamp duty post-COVID, boosting real estate and benefiting the economy.
3. Controlled Import Duties to Minimize Smuggling:
   • Excessive import duties on high-demand products like gold lead to more smuggling.
4. Complexity of Economics and Human Behaviour:
   • Economic policies must consider unpredictable human behavior and market reactions.
   • Economists play a crucial role in managing and predicting these complex dynamics.

Conclusion

• Eradication of black money requires strategic reduction in tax rates and rigorous implementation of fiscal policies to prevent tax evasion.
• Balancing Act: Effective economic governance involves finding the sweet spot between high taxes and no taxes for economic growth and government revenue.

Key Takeaway: Understanding taxation and its impacts is essential for combating black money and ensuring a thriving economy.

Referenced Study: Insights from the economic policies and outcomes of the Reagan administration in the U.S.

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