WHAT I DON’T UNDERSTAND ABOUT BLACK ECONOMY

WHAT I DON’T UNDERSTAND ABOUT BLACK ECONOMY

(OR There’s a hole in my bucket)

Today, in India, the concern about black money/economy is very high. Therefore, I felt it is important for me to try and understand what it means and then try to think of a way of getting rid of it. My understanding of economics is less than satisfactory so I hope to find some answers through reflections.

Business Dictionary defines “black economy” as:

“Usually untraceable, and hence untaxable, business dealings that are not reflected in a country's gross domestic product (GDP) computations.”

So, features of black money would be:

1.            Untraceable (I presume by government)

2.            Untaxable (by government)

3.            Not reflected in GDP (official figures)

So, I conclude from above that black money is basically that money which a government chooses to consider as black. It is necessarily not even criminal activity or corruption per se.

For example, building a house is not a crime per se. Selling or buying it is also not a crime. However, if tax is not paid on any part of the transaction value, that part becomes black money. Thus, any capital gains, registration fee, service tax or sales tax on raw material etc. not paid, such amount would be considered black money. All other economic factors of production viz. land, labour, capital and enterprise involved are real but they are rendered black because taxes are not paid on their possession or use.

But why don’t people want to pay taxes? For this, I must learn the definition of taxes. InvestorWords defines tax as:

“A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services.”

Governments levy taxes through a process of legal/administrative force to fund their expenditure. People who slip away are declared makers of black money. The above definition makes me think – if government expenditure were to become zero then tax required would be zero and no one would need to evade any taxes. This would make generation of black money meaningless and impossible by definition.

So, here’s my 1^st realization: There is a direct and positive correlation between black money and government expenditure. Reduce government spend and that will reduce need for taxation and hence generation of black money.

I learned in 9^th standard that prices for goods/services are determined by forces of demand and supply. If I am a sweeper and want to charge Rs 1000 per day to clean a 1000 sq ft house, I will find no clients. So I will lower my price. Maybe, I will start finding sufficient number of clients at Rs 100 per day per household.

Won’t this principle apply to public goods?

If people don’t want to pay the current level of taxes for the bouquet of public goods/services on offer by the government, the obvious way is to reduce the size/composition of that bouquet. This can be achieved through privatization, disinvestment and lesser governance. If good/service is privatized then prices would be determined by market forces. People will buy what they really want and pay what they can afford. There would be no need for government to take on that function and therefore there would be no need to fund it through taxes. The black wealth generated or transferred would convert to white price paid for goods and services. Black money would convert to white “producers’ surplus”.

Therefore, is there a case for removal of all taxes?

My 2^nd realization: There is an inverse correlation between privatization and black money. The higher the level of privatization, the lesser the black money. Similarly, there is a direct correlation between governance and black money. The lesser the governance, the lower is black money.

So far so good. Both my above realisations indicate that government and governance is the root cause of black money. This can be summarized as:

i               Nation has black money

ii              The State is the root cause of black money

iii            To reduce black money, governance should be minimized till the State withers away

Now, I think I am putting myself into a bind. If I conclude that Government/State should wither away, I suspect I will sound too much like a Marxist/Leninist and that certainly isn’t a fashion trend today. But, Friedrich Engles in in Part 3, Chapter 2, of Anti-Dühring wrote:

The interference of the state power in social relations becomes superfluous in one sphere after another, and then ceases of itself. The government of persons is replaced by the administration of things and the direction of the processes of production. The state is not "abolished", it withers away.

Suspending the thought, I try to think of a way to reduce government spending. Why is it necessary for government to run schools, hospitals, even build roads or other infrastructure? It is considered axiomatic that private sector efficiency in these sectors is many times that of public sector efficiency. That government school teachers are poor quality and overpaid. That government hospitals are death trap and doctors ill-trained, ill-equipped and overpaid. That whole of bureaucracy is over paid and inefficient.

In that case, I find no justification for retaining the machinery of the State. Why can’t education, health and infrastructure all be left to private sector where market forces would determine the price of services and compensation to teachers, doctors etc.?

Some people would argue, “But what of the poor?”

And I am dumbstruck. If for decent quality of education for say 1000 children we require school infrastructure of Rs 1,00,00,000 and at 1:25 teacher : student ratio we require 40 teachers of quality and the market price for such teachers is Rs 6,00,000 per annum, why should we settle for a school built with just Rs 10,00,000 and 10 teachers paid Rs 3,00,000 per annum? Why can’t students be charged that fee?

People would say, “Because, you moron – 70% of children wouldn’t be able to afford those private fees.”

So why should they get education?

“Because it will improve their earning capacity and lead to more development. Also, an educated nation is a stronger and better nation.”

But what’s the point of poor quality government education?

“Something is better than nothing.” People would say.

Ok. So why can’t we pay higher taxes and demand better school infrastructure?

“Higher taxes will kill private enterprise, silly fellow!” People would scream.

But we don’t want to replace government so let it kill private enterprise.

“Then how will government survive? Who will pay taxes?”

At this point I would give up. This chicken-and-egg argument applies to practically every sector where government is forced to get involved, for which it is constrained to collect tax, which is resented and people are forced to evade taxes, which in turn leads to generation of black money.

It would seem black money exists because of the State and to destroy black money, the State will have to be destroyed.

This reminds me of a great song whose words go like:

There's a hole in the bucket, dear Liza, dear Liza,
Then mend it, dear Henry, dear Henry, dear Henry,
With what shall I mend it, dear Liza, with what?

With a straw, dear Henry, dear Henry, dear Henry,
The straw is too long, dear Liza, too long,

Then cut it, dear Henry, dear Henry, dear Henry,
With what shall I cut it, dear Liza, dear Liza?
With a knife, dear Henry, dear Henry, dear Henry,
The knife is too dull, dear Liza, dear Liza,
Then sharpen it, dear Henry, dear Henry, dear Henry
On what shall I sharpen it, dear Liza, dear Liza?
On a stone, dear Henry, dear Henry, dear Henry,

The stone is too dry, dear Liza, dear Liza,
The stone is too dry, dear Liza, too dry.

Well wet it, dear Henry, dear Henry, wet it.

With what shall I wet it, dear Liza, dear Liza?
Try water, dear Henry, dear Henry, dear Henry,
In what shall I fetch it, dear Liza, dear Liza?
In a bucket, dear Henry, dear Henry, dear Henry,

There's a hole in my bucket, dear Liza, dear Liza,
There's a hole in my bucket, dear Liza, a hole.

 (You can listen to the song here.)

Turning off the tap doesn't help, as long as there's a hole in the bucket. Now, that’s a thorn in my side.