There is so much discussion about BLACK Money, that I thought of contributing my 3 ‘cents’ to this favorite topic of mine.
What is BLACK MONEY?
Income or Cash that is ‘not supossed’ to exist is BLACK MONEY
Now, the question is – WHY does Black Money get created in the first place?
I personally have analysed this subject and have 3 simple reasons to offer.
– DRACONIAN TAX LAWS
In India, just around the Indira Gandhi Emergency, PERSONAL INCOME TAX has climbed to peak rates of 90%!
That means if you earned Rs 100 at that time – the govt. would have take away Rs 90!
Now, that was bizzarre and stupid. A 10% savings did not allow Citizens to SURVIVE – save alone save money.
So, PUNITIVE INCOME TAX LAWS created the desire for Employers to PAY employees in CASH- so that they stayed motivated to do their jobs.
Hong Kong, Dubai etc have NO INCOME TAX. This means that if you earn Rs 100 – you keep Rs 100.
Hence there is very little scope to generate BLACK MONEY in the wage market in that Country.
– WAGE DIFFERENTIALS
If I want to build a room over my terrace that is a part of my flat – I will need a Mumbai BMC permission.
To get a permission, I know I will need to pay a BRIBE.
Bribes are exchanged using BLACK money.
So, lets take the case of the above situation. Lets assume that personal income tax in India is also 0%. Therefore, all my salaries are in my bank and I gladly accept full cheque payments for my income earned.
However, I cannot pay the BRIBE by Cheque – Hence, I go to my bank, withdraw Rs 1 lac in cash and pay the BMC official 1 lac to him – for him to give me the permission to build my room.
Question – WHY DOES THE BMC official (or a Cop or anyone else) DEMAND A 1 LAC BRIBE?
Its because his salary as per the BMC is probably 10-25k rupees per month. He is 50 years old and has a full family to feed! He CANNOT live and survive with 20k a month.
So, the BRIBE is nothing but a WAGE SUPPLEMENT.
If the BMC official were getting 1.25 lacs a month (which his counter part with equal responsibility in Corporate life is surely getting) – then I DOUBT he would be motivated to take a bribe – and hence negate the generation of BLACK MONEY.
Look at yourself – the moneys you earn and the salary you enjoy may be good enough for you or lesser that what you ‘want’ – but I doubt you will ever ask for a CASH BRIBE from people in the line of your duty!
RUNNING ILLEGAL ACTIVITY
If you want to run a Cocaine Business, then you cannot operate like a regular business. You need to keep your entire cash flows (purchases and sales) in Cash – and Cash that cannot be traced back to anyone – hence you have to operate via BLACK MONEY.
So, larger and more successful Economies in the world have to deal with MONEY LAUNDERING in the business of Drugs and Prostitution etc etc – where the activity ITSELF IS ILLEGAL, but regular commerce of those countries is relatively Black Money free.
The problem is that most discussions about Black Money in India are centered about the AMOUNTS and WHERE the money is stored – not WHY it got created in the first place, and more importantly HOW TO STOP it from getting created every passing minute.
Also, lets NOT forget that Black Money in the country is FED back to the Economy – via investments, trade, etc – so in a way it DOES lubricate the Economy and help GDP! Take for examples construction; lots of trading activities etc that banks dont finance. Black money DOES help here….. except it doesn’t get counted in the real GDP.
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Additional contribution by YATIN MULAY – one of the most brilliant minds on therodinhoods.wpengine.com below:
The case in point is ration of per capita income to the highest denomination; besides the fact that large denomination weaken the banking system.
USA:
[A]Per Capita Income: 40,000 USD
Highest Denomination: 100 USD
Ratio of A/B = 400
Canada:
[A]Per Capita Income: 43,100 CAD
Highest Denomination: 100 CAD
Ratio of A/B = 431
UK:
[A]Per Capita Income: 20,000 GBP
Highest Denomination: 50 GBP
Ratio of A/B = 400
Japan:
[A]Per Capita Income: 40,00,000 Yen
Highest Denomination: 10,000 Yen
Ratio of A/B = 400
India:
[A]Per Capita Income: 37,000 INR
Highest Denomination: 1000 INR
Ratio of A/B = 37
The 4th simple truth about black money which is more important than the 3 listed above is that it freaking needs to be brought back!
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