“Black money is a menace”. Well, sure it is, but why? In this blog, I answer precisely that question.
We all talk about “black money”. Those huge stashes of undisclosed money, mostly cash, tucked away secretly by certain individuals in safe havens.
We drool over it. We say it’s bad. We say it’s illegal, it’s unjust, it’s unfair, it damages the economy, and so on. We talk about everything but the point. But wait, hold on.
Do we really understand why?
What exactly is “Black Money”?
This is more of lexicography than economics. Yes, I’m referring to the metaphorical use of the word “black”.
Loosely speaking, when we refer to black money, we are referring to any form of money that the government can’t keep track of.
How is money kept track of?
So, how does the government keep track of money? Well, mainly through taxes. Rates of specific taxes are fixed. Suppose, you are paying 18% GST on a restaurant bill. When this tax gets deposited with the government, a simple back-calculation reveals the total bill amount.
For example, if the government receives ₹ 18 as GST on this restaurant bill, rate of GST being 18%, it knows that the bill amount must have been ₹ 100.
Ditto for income tax: merely by knowing the amount of tax you pay, having deduced the rate of tax from details mentioned with your tax returns, the government knows how much you earn every month.
There are other methods too, such as accessing bank transaction records, credit card bills, and so on. Combining all of them gives a pretty picture of the economy.
In fact, there is a separate branch of intelligence known as revenue intelligence, or financial intelligence, that keeps track of this paper trail you leave behind. And thus, it knowns how much money is circulating, in addition to where, when and how.
Why Keep Track of Money
Every country has what is known as a Central Bank, which is empowered by national legislation to use various measures to control the state of the economy. As for India, our Central Bank happens to be the Reserve Bank of India, its governing legislation being the Reserve Bank of India Act, 1934.
The Central Bank is the chief economic policymaker of the country. Through various indicators, it monitors the health of the economy, and is empowered by legislation to accordingly take various measures (such as, modifying interest and exchange rates) as it sees fit to keep the national economy in proper shape.
Intricacies of this delicate game aside, knowledge is power. The key for the Central Bank to make appropriate decisions about maintaining the economy is being aware of what the hell is going on. And the fundamental element in that process involves keeping track of money (which is pretty much all economics revolves around): how fast it’s changing hands, how much leaves the country, how much enters the country, and so on.
Only when does it have a full picture is it able to make an effective evaluation of the economy and do what it has to accordingly.
The Art of Governance
The another, perhaps more important reason why governments cry hoarse over untaxed money is loss of revenue.
The art of governance involves keeping money in circulation.
Your job as the government is to take money from the people, and then use that very same money to employ those very same people (well, a different group, perhaps) to provide goods and services to the people. The people avail such services by giving you more money, and the cycle goes on and on.
Similarly, when people are employed, they get a wage or a salary. Some of it comes back to the government as taxes, which are again using to deliver goods and services and pay salaries, and so on, and on and on.
That’s all governance is about. Keep the money circulating. If not by free will, then under force of penalty. That’s how the government earns its revenue. What does it do with this revenue?
1. Protect the weak from the powerful
Perhaps many of us would not like to admit in, but the truth is, the real reason why the existence of something called a government came into being is to protect the masses from the powerful.
All this revenue helps run the military, law enforcement, the criminal justice system. They protect us against oppressors and maintain a stable society.
In many ways, since the richest people pay the most taxes, this also allows the government to use this money to uplift the weak. This, once again, prevents the concentration of power and wealth (which itself is power) in the hands of a few.
What if such a protective umbrella didn’t exist? It would be hell on Earth.
2. Maintain a Welfare State
Without all this revenue, you can forget the government offering us rations, birth control, health services and the so many other social welfare schemes it does offer us and we so love.
Gaming the System
Of course, this is a complex system. Financial Intelligence is no cup of tea. And like every system, it has its own set of loopholes.
When you manage to successfully exploit these loopholes and siphon off money with the financial apparatus of the State unable to keep track of it, such money becomes “black”.
In today’s world of computerized banking, it is increasingly difficult to go “off-grid”. Most of our transactions no longer involve paper money or coins, it involves sending computer commands to update that imaginary value known as your “bank account balance”. And all of it is logged. It’s a gold mine for financial intelligence, it’s easy to keep track of.
What isn’t easy to keep track of is paper money, and coins. You’re using it everyday. You’re paying the bus conductor, the taxi driver, the hawkers, and so many hundreds of other people. Most of these transactions are not taxed.
So, it’s difficult to keep track of. Although there are ways, if you don’t declare to the government how much money you’ve transacted, and if you manage to do it properly, it often goes unnoticed.
That’s why, most of the black money is cash. It’s why criminals don’t take payment with credit cards (the sanity of one who does is to be doubted). It’s why bribes are given in cash. Paper money doesn’t have a GPS tag or an RFID chip attached to it to keep track of.
What are the Consequences?
1. Miscalculation of the Economy
So, when you exploit loopholes in the system and go “off-grid”, the Central Bank and other government agencies effectively lose track of your money.
There can be anything from a slight to tremendous miscalculation of the economy: after all, we know next to nothing about the huge black market. It can wreck the economy.
2. (Potential) Social Chaos
When you lose track of someone’s money, it is a Herculean task to bring it back. The end result? That untraced money stops coming back to the government: it stops circulating the holy circle.
And if money stops circulating, well, we all know what might happen, as we discussed a bit earlier – the law of the jungle prevailing.
3. Most importantly, it may precipitate more social chaos
You may argue, it is highly unlikely that siphoning off a proportion of the nation’s economy into the black market would really lead to widespread social chaos. True.
But there exists a greater menace.
Why, you ask? Well, you see, would you like it if you’re the honest guy paying taxes and you watch your neighbour or some big fish not pay their taxes and, at least for the moment, get away with it?
You wouldn’t. You’d feel violated, you’d feel exploited. You’d question, if he can get away without paying taxes, why should I suffer and pay taxes? Imagine what could happen if a large number of people use this line of reasoning to stop paying taxes.
When someone gets away without paying taxes, others feel violated. Unless the former is brought to justice, this serves as an incentive for the latter to follow the in the former’s footsteps.
If everybody does, well, the government would be left with no money at all!
Therefore, it is imperative people pay their taxes. It is imperative that money is thus kept circulating. It is imperative that people who break this rubric, that is to say, those who indulge in “black money”, be prosecuted.
If not for any other reason, to ensure our own survival. No wonder the government goes crazy about black money!