hi everybody when Modi G became the prime minister of India one of the most important agendas and promises that he had was to eradicate the black money in India but the question is 10 years one demonetization two Modi terms in several GST reforms later have we really succeeded in eradicating Black [Music] money November [Music] [Music] according to Ahmedabad customs the amount of gold smuggled seized at the airport has seen a 65% rise in fi 24 wherein 2 41.1 kg of gold as in 180 CR rupees worth of gold was seized and this 5-year Trend shows that the amount of gold smuggled from the Sardar pil airport is increasing at an alarming rate and this is an indicative of the figures all across the country secondly RBI says that there was a 102% increase in the number of fake 500 rupee notes in the Indian economy so counterfeit currency is still a growing problem even after demonetization and I was shocked to know that there is even a black stock market system in India and this system is so big that while the average daily trading amount in NSE is about 1.02 lakh CR rupees in this black stock market the average daily trading amount is estimated to be 0.7 lakh CR rupees which means 70,000 CR rupees worth of black transactions are happening every single day just like the National Stock Exchange so the question is have we really succeeded in eradicating the black economy well you know what you would be shocked to know that the root cause of everything from smuggling to Black Market to even the underworld and crime everything is linked to just one variable in the Indian economy and that is tax tax ta tax tax government has reduced and rationalized tax rates Indian corporate tax becomes very attractive and should be able to attract uh higher Investments transparent taxation honoring the honest tax system so with the budget announcement coming we laid down a very interesting piece of research which tells us how are taxes directly used as an instrument of wealth by the underworld and Smugglers of India how does the black market and black stock market get created because of the tax system if we have zero tax in India what could happen to our economy and most importantly since black money is a virus to our economy what is the most practical way to eradicate black money in India CH let's start from the basics the first thing we need to understand is how high taxes result in Black economy smuggling and even promote the growth of the underworld let's understand this using an example did you know back in the 1970s which is during the indraa Gandhi ERA this is what our tax structure looked like it started from a moderate 10% tax rate and went all the way up to 93.5% yes tax rate in India back then stood at 93.5% Beyond a certain slab so if you made anything about 2 lakh rupees you had to pay 93.5% tax sounds terrible right well for some reason even then the Inda Gandhi government thought that by taxing the rich so much they could simply make more money from the rich and use that money from the rich for the welfare schemes of the poor and eventually they thought they could empower the poor with this tax money collected from the rich this was the ideal result expected but do you know what happened because of this tax structure this tax structure indirectly contributed to the massive Rise of Black money which eventually became an instrument of wealth for the underworld and people like da Ibraham and mustan da runs a massive Empire in the state of Maharashtra the question is what is the connection between the tax structure and the underworld and how can tax structure Empower people like da Ibrahim well let's understand this using a simple hypothetical example between da Ibrahim and jamnadas back in the 1970s let's say jamnadas was a rich businessman who wanted to sell his apartment in South Bombay at a market value of 5 lakh rupees but since the tax rate about 2 lak rupes was taxed at 93.5% jamnadas wanted to find a way to avoid this tax burden similarly da Ibrahim had made 50 lakh rupees through his illegal business and he wanted to park his money somewhere this is when both jamnadas and da Ibrahim met and herea they evaded taxes using a simple method both of them came to an agreement such that jamad Das would under report the sale value of the apartment to 1 lakh rupees and da would only pay 1 lakh rupees officially and pay pay an additional 4 lakh rupees in cash directly to Sate jamnadas this way jamnadas avoids paying a hefty income tax on the actual sale value of 5 lakh rupees and only pays taxes on 1 lakh rupees so very easily he avoided the 93.5% tax bracket secondly DA has successfully converted his illegal income into a legitimate asset which will further appreciate to a staggering value and give him both wealth and power cherry on the cake da only had to pay Stam Duty on 1 lakh rupees instead of 5 lakh rupees but lastly while jamnadas and da both benefited from this transaction who was the actual loser over here the loser over here was the government of India because the government could not collect taxes from jamnadas even though he was rich Number Two the government could not collect stamp Duty even though the property was sold at 5 lakh rupees and most importantly the government of India had given the superpower of wealth multiplication to the underworld by which they could not just easily legitimize their money but also so grow their real estate Empire all across India eventually making them more and more powerful and this is exactly what is happening right now but right now it is happening in the Indian stock market and here's where something called dubba trading comes in whereby 70,000 crores worth of transactions are happening every single day making it one of the biggest black markets in the world Market Dabba or box trading refers to an illegal practice of trading that takes place outside the purview of stock exchanges it's like gambling so growing black money is one of the repercussions of this so the question over here is how does the system work and how are we not able to do anything about it let's say auru is a successful Trader who trades in Futures and options with a capital of 10 lakh Rupees and rotates his Capital multiple times in such a way that his daily turnover reaches 1 CR rupees per day so how does this happen he would invest 10 lakh Rupees make a profit of 2 lakh rupes and then again deploy 12 lakh rupees into the market so this way through multiple rotations he ends up achieving a turnover of 1 CR rupes and every time he places a trade he has to pay a host of taxes brokerage and fees to different entities in the system so if you look at this table there is brokerage fees of 20 rupees per executed order a security transaction fees transaction charges to to the NSE then there is GST sebi charges and then stamp charges and this amount has to be paid regardless of whether he makes a profit or loss all right and this amount for a turnover of 1 CR rupees per day could range anywhere between 2,000 rupes to 2,500 rupes per day and out of this 2,000 to 2,500 rupes amount 1,00 to 1,250 rups turns out to be just security transaction tax and here's where the catch comes in so listen list to this very very carefully let's say Aura generates a handsome return on his capital of 50% at the end of the year so at the end of the year he has generated 15 lakh rupees giving him a profit of 5 lakh rupees right well guess what out of these 15 lakh rupees he has to pay 2,000 Rupees per day in all these charges including brokerage Seb charges NSE charges GST and security transaction tax so assuming that he trades for 200 days a year this amount that he has to pay comes out to be 2,000 into 200 which is 4 lakh rupees so out of 15 lakh rupees he has to pay 4 lakh rupees in just these taxes fees and brokerage which means he will be left with only 1 lakh rupes in profit and the sad fact over here is that here Aura is an exception who has made a profit of 50% because of which he's still able to take home 1 lakh rupees in profit whereas if you look at what happens to most people sebi itself says that more than 90% of the traders in derivatives incur losses so in spite of losses he still has to pay these fees which makes life very very difficult for Traders and if you look at it from the broker standpoint I actually found a very funny stat here's the revenue of the top five brokers in India and it comes to 15592 N5 crores in fi23 but you know what with just the security transaction tax alone the government alone has made 2,85 CR rupees so if you see the government is generating more Revenue than the five biggest Brokers combined so long story short it's not easy to be a Trader with so many taxes this is a reason why apuro finds a hack to Aid taxes and this is where dubar trading comes in so listen to this very very carefully instead of getting salary directly in his bank account apuro will ask the contractor to pay in cash to avoid income tax and and he will hide his actual income but he cannot use this cash to buy stocks right because if he buys stocks using this cash then the income tax department will get to know about his income and then they will send him a notice with fines and this is where dubba trading comes in instead of using a broker like zeroda or up stocks to trade Aura will contact a dubba trading agent and how does this dubba trading happen in dubba trading the agent executes the trade outside the official Market in such a way no actual order is placed on the exchange at all so the question over here is if a stock is not being bought or sold then from where will the profits actually come from well here's where the buyer bets on the stock price movement for example if Aura bets on a Reliance stock which is priced at 1,000 rupees then at the end of the day if the stock price of Reliance Rises to, 1500 rupees Aura will make a profit of 500 rupees but if the stock price Falls to 900 rupes he will have to pay the difference to the dubba broker so if you see there is no actual transaction happening no brokerage fees no sebi fees no ST and most importantly no taxes all he has to pay is the minor brokerage fees to the Duba broker so if you see it is just plain betting this is the reason why to save taxes and the transaction fees investors like apura get into the black market and this Market is set to have transactions worth 70,000 crores so what did we learn from this story high taxes or high charges although they make sense on paper it only takes a few price acts here and there to make the market go from white to black in this case if the government increases the security transaction taxes on trading it will make trading more expensive and it will push the investor either into the black market or into other countries where trading is easier so this way the government ends up incurring a loss and the entire system along with all the entities end up incurring a loss in fact you would be shocked to know that today the highest marginal rate of taxes is about 40% and this is the bracket for high net worth IND individuals who trade in big volumes so the increase in trading cost and taxes could directly promote dubba trading in the Indian system so are we saying that we should not have taxes like the income tax and security transaction tax at all because even after reducing taxes from 93% to today's highest rate of 40% even then people are going to try and evade taxes right so has anyone actually proved that reducing taxes can benefit the system well strangely the answer is yes and it is coming from one of the most iconic economic policies introduced by one of the greatest residents of the United States who went by the name Ronald Reagan we cut your tax rates Anyway by nearly 25% and what that helped trigger was falling inflation falling interest rates and the strongest economic expansion in 30 years this is a story that dates back to 1981 America during this time the economy of America was not doing well at all if you look at this chart inflation had almost hit a peak of 11.8% unemployment had shorted from 6.1% in 1970 to 88.5% in 1981 and the real GDP growth stood at just 3.2% from 1970 to 1980 whereas from 1960 to 1970 the US economy was growing at 4.5% and the condition of the US economy was so bad because in 1973 and 1979 because of the Arab Israeli War the Arabs got angry at the US and they suddenly hiked the price of oil from $4.8 in 1973 to $12.52 in 1974 that is three times increase in the oil price and then furthermore it shot up to $21.57 in 1979 and reached $ 37.1 in 1981 so if you see the price of oil increased by nine times in just 8 years the oil producing countries of the Arab world decided to use their oil as a political weapon world wars among big powers are quite possible to control dwindling oil supply resulting in their decision to reduce the flow of oil to America and other nations supporting Israel dealers raised prices to more than 40 cents a gallon today's OPEC increases are expected to drive the price of unlet it up to a national average of 77 cents per gallon gas lines and many stations were a lot longer than normal in simple words in the Indian context it's like saying the petrol price in India in 2016 was 50 rupees a liter but today the price of petrol has started charged 450 rupes a liter so do you realize if something like this happens what will happen the cost of goods will go up businesses would incur losses jobs will be lost and the economy will suffer right this is exactly what happened in the United States secondly people did not have enough money to spend because if you look at this chart the tax bracket in the US started from 14% and went all the way up to 70% this is the reason why to solve this one one problem one fine day Ronald Reagan made an iconic announcement where he declared that the income tax at the highest lab would be cut down from 70% to just 28% and along with it he also reduced corporate tax from 48% to just 34% so now the question over here is this is a big big jerk for the economy right then how did the government generate Revenue if not through taxes and how did Donald Reagan think that decreasing taxes will actually improve the econom well this is where a theory called the trickle down effect comes in so as usual let's understand this using an example and listen to this very very carefully okay because you're going to see a lot of numbers coming on screen let's say there was a company called American Baker which had a profit of $10 million produced 10 tons of bread and had 2,000 employees with an average income of $50,000 so with the 48% corporate tax rate earlier it paid $4.8 million in taxes which left how much money 5 .2 million for investment and growth with the company similarly the employees with an average salary of $50,000 they paid 30% tax which on an average comes out to be $115,000 in taxes per employee but after the corporate tax was reduced from 48% to 34% so this year the company just paid $3.4 million in taxes which left $6.6 million with the company for investment and growth so now on the outside it looks like the government is losing out on 4.8 million minus 3.4 million which is the government losing out on $1.4 million in tax revenue right but the catch over here is that even after tax cuts the company has $6.6 million which it can invest in new Machinery research and development and to expand its operation to produce 15 Tons of bread right similarly the employees are now paying only $7,500 in taxes instead of $115,000 in taxes so now these employees now have $7,500 extra with them and lastly since the company has extended its capacity to 15 Tons it had to hire 1,000 new employees at an average salary of $50,000 per year so now the American baker has 3,000 employees with an average income of $50,000 if this is clear to you let's move on to the next part now assuming that these employees spend 80% of their income if you look at how much these employees will spend in the American economy it is a staggering amount so let's do the math there are 1,000 new employees spending $40,000 each in the American economy so this extra spend comes out to be $40,000 into $1,000 which is $40 million on top of that the company also has $2,000 old employees who now have $7,500 extra to spend so again if these 2,000 old employees spend 80% of their $7,500 the total spending in the American economy turns out to be 0.8 into 7,500 into 2,000 which is $12 million if this is very very clear to you let's summarize how this scenario has resulted into an economic output for America the tax paid pre- tax cut was 4.8 million which is now $3.4 million after tax cut the total money left for investment back then was $52 million pre-tax cut and $6.6 million post tax cut earlier zero new jobs were created but post tax there were 1,000 new jobs created and because of this the new employees spending got added in the American economy which is 1,000 into $40,000 equal to $40 million then we also saw an increased spending from the old employees which came out to be $12 million so the additional economic impact of this employee spending turns out to be $40 million + $12 million equal to $52 million and now what happened to these $52 million these $52 million have been spent into movies diapers milk and several other products and services is all across America and now even if we assume that the average tax paid on these products was just 15% the government would still make 15% of $52 million which is $7.8 million so do you realize in this scenario initially it looked like the government lost $1.4 million in taxes but eventually they not only gained $7.8 million in tax revenue through consumption but also created 1,000 new jobs and $52 million of economic activity this is how Ronald Reagan envisioned tax cuts to directly result into new jobs more spending and higher economic impact eventually growing the American economy so the question is did the US economy actually grow well the stats say that the US economy experienced a period of sustained growth in the 1980s wherein the real GDP after initially falling at minus 1.8% in 1982 grew by an average of 4.41% per year from 1983 3 to 1989 as compared to 3.03% in the late 1970s similarly the unemployment rate fell from 7.2% in 1980 to 5.3% in 1988 and even the inflation fell from a peak of 13.9% in 1980 to a low of just 1.5% in 1987 this is what happened to the US economy after the reduction in taxes now obviously there are a lot more parameters at play and taxes turn out to be just one of these parameters which is why we cannot certainly say that all of these things happened only because of the taxes but on the outside if you think about it this concept looks fantastic right then the question over here is if this worked out so well why did the US government go on decreasing taxes well that is because ladies and gentlemen along with these three advantages theonomics might also have brought in three disadvantages to the American economy now what are these disadvantages number one income inequality increased in the US which means the gap between the rich and the poor widened in the 1980s secondly it is said that because of Economics the national debt in the US increased from 712 billion in 1980 to $ 2.41 trillion in 1990 and when we looked into the stats we realized that this is not just because of the tax cuts but also because of increased military spending and lastly theonomics is also said to have resulted into an increased trade deficit as America imported more than it exported if you see this the merchandise trade deficit in 1980 America was $25.5 billion but by 1987 it shot up to $ 1595 billion so even though on paper it looks like a great economic philosophy there is one big big problem because of which everything could become a disaster so now the question is we just learned that because of Economics when corporate taxes go down those companies will then recruit more people they will expand their operation and those people who just got their jobs will then go on to spend more money in the economy eventually resulting into a positive economic output right then why do people still say that economics was a disaster and how did it cause harm to the American economy well let's quickly understand this using the continuation of our old example because only then you'll be able to understand that how less of a control the governments have over the functioning of these companies and in spite of having all kinds of tax policy how is it that things could go wrong okay you see in the American Baker case we saw that this $52 million in economic impact was caused because the company did all the good things they reinvested their money to increase capacity they recruited more people and they also paid these new people well but you know what there is also a possibility that when taxes were reduced from $4.8 million to $3.4 million the founder of American Baker just took this entire $1.4 million home as salary right so if this happened he would not invest any money into expanding their operation isn't it or even if he did not take out any salary he could have just kept the money in the company itself without investing a penny into machines right and now if you see the scenario in both these cases there is no added economic activity and the government ends up suffering an income loss with no economic activity even after tax reduction this is a reason why we cannot suddenly wake up one day and drop our income tax or corporate tax to zero and just expect these companies and individuals to reinvest money create more jobs and eventually cause a positive economic output this is the reason why not just India but for any country zero income tax is practically impossible unless you have a lot of oil money so romics essentially teaches us that there is a sweet spot between no taxes and very high taxes and this sweet spot will result into both economic activity as well as high government income and if you go below The Sweet Spot and reduce taxes there won't be enough economic activity for the reduction of taxes and if you increase the taxes by a large extent then the black economy will prosper if this is very very clear to you let's come to the most important part of the episode and that are the most important lessons that we and the government of India both need to learn and apply in today's scenario lesson number one increasing taxes will only lead to more black money circulating in the market so if we have to eradicate black money all we need to do is decrease taxes as much as possible without hindering the income of the government such that the wealth can trickle down and the rich people do not have the incentive to hide their money lesson number two increasing taxes and no trickle down effect will also be a disaster because it will make the rich richer and the poor poorer so as the government decreases taxes it has to actively work towards bringing in policies that will help the wealth trickle down to the bottom of the pyramid for example the Finance Minister told us in our podcast that in Maharashtra the government slashed stamp Duty from 5% to 2% just after covid such that the real estate market could boom and the impact of this Stam Duty reduction was so beautiful that people people bought more Flats the builders got cash flow and eventually these Builders paid back their loans paid their suppliers and most importantly they paid their workers so a 3% discount on Stam Duty ended up putting food on the plates of millions in Maharashtra lesson number three as taxes and import Duty increases smuggling will increase in 2019 the government increased the customs duty on gold bars from 133% to 15.5% to 18.45% in 2022 and and in 2023 the import Duty on products made of precious metals was increased from 22% to 25% so if you look at this chart in 2022 23 Gold smuggling in India touched a 4year high and almost 4,000 kges of smuggled gold was seized in the first months of the fiscal year so in short we need to be very careful when we increase import duties on high demand products like gold so if we have to stop smuggling all we need to do is slash our import duties to an extent where the government can make money but without pinching the Traders and last and most importantly as citizens of India we need to understand that economics is super super complicated and no matter whether the government increases or decreases taxes there is absolutely no guarantee that it will benefit the economy because even though the taxes are in control of the government how 1.4 billion people will react to these taxes that is something that no government no Economist and no AI has been able to predict in the history hisory of mankind so if you ever meet an economist who works for the government pay your respects to them because they are the ones who are trying to bring order to this madness called Taxation and this humongous economy called the Indian economy that's all from my side for today guys I just hope you understood everything and this was not too heavy for you if you learned something viable please make sure to hit the like button in order to make guy Baba happy and for more such insightful business and political case studies please subscribe to our Channel thank you so much for watching I will see you in the next one bye-bye [Music] [Music]