Demonetization and Black Money

Black Money has been central to public discussions for quite some time now, and the sledgehammer of demonetization is being viewed by a large number of people as the definitive cure. But a sure-fire solution always strikes at the root of the problem whereas demonetization is more like shearing the leaves. Black money stems from the disinclination of the people to pay taxes. So, the natural question is why? Are the people inherently dishonest? Are they so selfish as to not see the obvious benefits of financially enabling the government to govern better? Don’t people in general want the government to function smoothly without having to face shortage of resources? And the most important, don’t they want to be at peace with their money with the fear of the taxman’s knock at the door put to rest? Isn’t peace of mind a valuable thing?

Black money is mostly with the businessmen. Not the top industrialists of the country, but the countless businessmen who run their large and small businesses battling all odds because anybody who has any experience in selling even a needle in India knows it’s not easy to do business in this country largely owing to government’s long-standing anti-business policies. Even golgappa vendors in Connaught Place can tell you what it is like to run such a small business and how many government-made problems they have to brave to sell their things. Permits, licenses, permissions, taxes on goods and sales, this number and that number and then the bribing the government officials so that they do not force in additional hurdles. Running a commercial establishment would require one to have a commercial electricity meter installed with much higher charges payable for the electricity simply because one is trying to do business. In other words, the government does practically everything to discourage businesses through its utterly needless and hugely cumbersome processes that have earned the badge of ‘red-tapism’. When, after having gone through all of it, a businessman manages to make a respectable amount, he finds the government at his throat demanding a substantial share of his hard earned money. What for? For having tried their level best to not let him earn? Any successful business who wants to discharge his tax liabilities has to give over 30% of his taxable earnings to the government.

The frustration of doing business meets the considerable weight of the tax burden to produce the seething resentment against income tax, particularly in the upwardly mobile middle class because they feel that the same body that did everything to make it difficult for them to do business comes after a large chunk of their income when they finally manage to earn a bit despite government-created hurdles in addition to the regular business hassles. So, it’s hard earned and hard fought for money, which turns dark when the businessmen deprive the government of its share under the law. However, retaining black money is not a comfortable enterprise for anyone, and at least some of the less adventurous hoarders of black money would very much like to relieve themselves of the headache provided they do not have to let go of a substantial portion of their earning, for if they have to part with a large amount of their money, it becomes tax evasion becomes worth the accompanying risk and headache.

Let’s not forget that the government has not really been kind on big spending. Taxes on dining out and outdoor entertainment of all kinds, including cinema tickets, has been constantly on the rise as though the government wanted to make it prohibitively expensive for people to relax and have fun outside their houses. Heavy taxation takes a major toll on the volume of the businesses in the hospitality industry, and associated businesses that generally benefit when people go out to have a good time with family and friends. What’s the purpose of raising taxes on dining out and entertainment? Is eating out or watching a film or a play injurious to health, like cigarettes, necessitating discouragement? Why can’t the tax be kept reasonable so that more people have more fun and spend more thereby allowing the commercial establishments to do brisk business making the government get more money by way of taxes? What’s wrong with that kind of arrangement? On the contrary, however, the government currently works on the principle that those who have more to spend on luxuries must pay more in taxes, like there was some inherent sinfulness involved in earning more and having more disposable income.

It seems that the government is working on the premise that a large number of people with taxable incomes would somehow evade tax, and to make up for the lost money, the government needs to tax those who cannot escape tax liability more heavily. quite obviously, if less number of people pay taxes, they have to pay more to compensate for those who do not pay. The other way round is also true. If the taxes are more reasonable, a much larger number of people would be willing to pay the taxes, which, in turn, would enable the government to function just as efficiently as before without having to tax anybody too heavily and also without having to spend huge amounts of money in prosecuting people for tax evasion. Furthermore, it would bring down the size of the black economy without many drastic measures, at least not frequently.

The basic idea is to inspire people to pay their taxes by making the tax environment conducive to that end instead of using coercive measures to chase money out even if it means destroying it. Measures like demonetization are desperate, and are generally not very effective at remedying the problem of black money because the generation of black money is a systemic problem, and needs to be addressed at the root level.

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