Did Modi really kill black money in India? : Economic case study

Summary

This video script discusses the impact of high taxation on the Indian economy, focusing on Prime Minister Modi's efforts to eradicate black money. It highlights the persistence of issues like gold smuggling and counterfeit currency despite reforms. The script delves into the connection between tax structures and the growth of black markets, using historical examples and the 'trickle-down effect' to argue for balanced taxation to curb black money and promote economic growth.

Takeaways

• 😕 Despite Prime Minister Modi's agenda to eradicate black money, issues like gold smuggling and fake currency persist in India.
• 📈 There has been a significant increase in gold smuggling and the black market, with an estimated daily trading volume of 70,000 crores in the black stock market.
• 💼 High tax rates can inadvertently contribute to the growth of the black economy, as seen in India's history with a 93.5% tax rate in the 1970s.
• 🤝 The connection between tax structures and the underworld is exemplified by how tax evasion can empower criminal enterprises.
• 🏦 The Indian government's revenue from security transaction taxes alone surpasses the combined revenue of the top five brokers, indicating the high cost of trading.
• 📉 High transaction costs and taxes can push investors towards the black market, known as 'dubba trading,' to avoid fees and taxes.
• 🇺🇸 The Reagan-era tax cuts in the US demonstrated that reducing taxes can stimulate economic growth, but also had downsides like increased income inequality.
• 📊 The 'trickle-down effect' suggests that tax cuts for the wealthy can lead to reinvestment and job creation, benefiting the broader economy.
• 💡 The Indian government must find a 'sweet spot' in taxation that balances revenue generation with preventing the growth of black money and smuggling.
• 🚨 Increasing taxes without ensuring a trickle-down effect can exacerbate wealth disparity and may not benefit the economy.
• 🌐 The complexities of economics mean that the impact of tax policies is unpredictable and requires careful management by governments.

Q & A

What was one of the key promises made by Prime Minister Modi when he took office?

One of the key promises made by Prime Minister Modi was to eradicate black money in India.

What is the impact of high taxes on the economy according to the script?

High taxes can lead to the growth of the black economy, smuggling, and even promote the growth of the underworld, as they incentivize tax evasion and other illicit activities.

How has gold smuggling in India changed in recent years according to the script?

Gold smuggling in India has seen a 65% rise, with a significant amount of gold being seized at the airport, indicating an alarming increase in this illicit activity.

What was the reported increase in the number of fake 500 rupee notes in the Indian economy after demonetization?

There was a 102% increase in the number of fake 500 rupee notes in the Indian economy after demonetization, suggesting that counterfeit currency remains a significant problem.

What is the estimated average daily trading amount in the black stock market in India as mentioned in the script?

The estimated average daily trading amount in the black stock market in India is 0.7 lakh CR rupees, indicating a substantial volume of illegal transactions.

What is the connection between high tax rates and the rise of black money in India, as explained in the script?

High tax rates can indirectly contribute to the rise of black money by incentivizing tax evasion and creating opportunities for illegal activities to launder money, as illustrated by the example of the 1970s tax structure.

Why did the US economy experience a period of sustained growth in the 1980s according to the script?

The US economy experienced a period of sustained growth in the 1980s due to tax cuts implemented by President Ronald Reagan, which triggered falling inflation, falling interest rates, and economic expansion.

What are the potential downsides of the economic policies that led to the growth of the US economy in the 1980s?

The potential downsides include increased income inequality, a rise in the national debt, and an increased trade deficit due to more imports than exports.

How does the script suggest that the government can address the issue of black money in India?

The script suggests that the government can address the issue of black money by decreasing taxes to reduce the incentive for tax evasion and wealth hiding, while also ensuring that wealth trickles down to the lower economic strata.

What is the 'trickle-down effect' as mentioned in the script, and how does it relate to tax policy?

The 'trickle-down effect' is a theory suggesting that tax cuts for the wealthy and corporations will result in economic growth that benefits the broader population. It relates to tax policy by advocating for reduced taxes to stimulate investment, job creation, and spending in the economy.

What is the importance of understanding the complexity of economics when it comes to tax policy, as highlighted in the script?

The importance lies in recognizing that tax policy effects are not guaranteed and can vary widely based on how individuals and businesses react to changes in taxation. This complexity demands careful consideration and nuanced policy-making.

Outlines

00:00

🏦 Modi's Fight Against Black Money

The script addresses the Indian Prime Minister Modi's campaign against black money since his tenure began. Despite measures like demonetization and GST reforms, the issue persists. The script highlights a 65% rise in gold smuggling and a 102% increase in counterfeit currency post-demonetization. It also reveals the existence of a significant black market in India, with an estimated daily transaction volume of 70,000 crores, suggesting that eradicating black money is far from achieved. The root cause is linked to the tax system, and the script proposes that transparent taxation and honoring the honest tax system could be part of the solution.

05:02

📉 The Impact of High Taxes on Black Economy

This paragraph delves into the unintended consequences of high taxation rates in India, particularly during the 1970s when rates reached up to 93.5%. The script uses a hypothetical scenario to illustrate how high taxes can lead to black market transactions and benefit the underworld. It explains how tax evasion through underreporting of sales can convert illegal income into legitimate assets, thus empowering criminals economically. The paragraph also introduces the concept of 'dubba trading,' an illegal practice that contributes to the black market, and how high transaction costs can push investors into this illicit activity.

10:02

📊 The Economics of Dubba Trading and Tax Evasion

The script discusses the mechanics of dubba trading, an illegal trading practice that avoids official market regulations and taxes. It provides an example of how a trader can increase turnover by rotating capital and the associated costs, including brokerage fees and taxes. The high costs of trading legally can incentivize traders to engage in dubba trading, resulting in a significant black market. The paragraph also contrasts the revenue of major brokers with the government's earnings from security transaction taxes, highlighting the potential loss to the government if trading is pushed into the black market.

15:03

📉 The Reaganomics Experiment and Its Outcomes

This section examines the economic policies of U.S. President Ronald Reagan, particularly the significant tax cuts implemented in the early 1980s. The script outlines the economic challenges faced by the U.S., including high inflation, unemployment, and the impact of the oil crisis. Reagan's tax cuts, which reduced the highest income tax bracket from 70% to 28% and corporate tax from 48% to 34%, are presented as a strategy to stimulate economic growth. The 'trickle-down effect' theory is introduced to explain how tax reductions could potentially benefit the overall economy by increasing investment, job creation, and consumer spending.

20:04

📈 Economic Growth and the Trickle-Down Effect

The script provides an example to illustrate the potential positive outcomes of tax cuts, using a company called 'American Baker' and its employees. It explains how reduced taxes can lead to increased investment, job creation, and higher consumer spending, which in turn can generate additional tax revenue for the government through consumption taxes. The example demonstrates how tax cuts can stimulate economic activity and potentially increase overall tax revenue, despite initial reductions in direct taxation.

25:06

💡 Lessons from Reaganomics for India's Economy

The final paragraph draws lessons from the Reaganomics experience for the Indian economy. It emphasizes the importance of finding a balance between high and low taxation to prevent black money circulation and smuggling while ensuring government revenue. The script suggests that tax reductions should be accompanied by policies that promote wealth distribution and economic activity. It also warns against the potential negative consequences of extreme tax policies, such as increased income inequality, national debt, and trade deficits. The paragraph concludes by acknowledging the complexity of economics and the unpredictability of how tax policies will affect a nation's economy.

Keywords

💡Black Money

Black money refers to funds that are earned, transferred, or utilized in an illegal manner, often to evade taxation. In the video's context, it is discussed as a significant issue in India that the Prime Minister aimed to eradicate. The script mentions that despite measures like demonetization and GST reforms, the problem persists, indicating the complexity of addressing this economic challenge.

💡Demonetization

Demonetization is the process where a currency unit is no longer recognized as legal tender. In the script, it is highlighted as one of the key steps taken by the Indian government to combat black money. The reference to 'one demonetization' suggests it was a significant event in India's financial history, aiming to curb black money and counterfeit currency.

💡GST Reforms

GST stands for Goods and Services Tax, and the term 'GST reforms' in the video refers to changes made to the tax system to streamline and simplify the process of taxation in India. The script implies that these reforms were part of the government's agenda to tackle black money, although it questions their effectiveness.

💡Smuggling

Smuggling is the illegal transportation of goods or people across borders. The video script discusses the rise in gold smuggling as an indicator of the ongoing presence of black money in India. The 65% rise in gold smuggling at the Ahmedabad customs is used as an example to illustrate this issue.

💡Counterfeit Currency

Counterfeit currency refers to fake money that resembles genuine currency in appearance but lacks the legal backing. The script mentions a 102% increase in fake 500 rupee notes, indicating that despite anti-black money measures, counterfeit currency remains a significant problem.

💡Black Stock Market

A black stock market is an unofficial market where trading occurs outside of regulated exchanges. The script introduces the concept of a black stock market in India, where an average daily trading amount of 0.7 lakh CR rupees is estimated, comparing it to the National Stock Exchange to emphasize the scale of unregulated trading.

💡Tax Structure

Tax structure refers to the framework within which taxes are imposed and collected by the government. The video discusses how high tax rates in the past, such as the 93.5% tax rate during the 1970s in India, indirectly contributed to the rise of black money and the empowerment of the underworld.

💡Dubba Trading

Dubba trading, also known as 'box trading,' is an illegal practice of trading that occurs outside the purview of stock exchanges. The script uses the example of Aura, a trader, to explain how dubba trading allows individuals to avoid taxes and fees, contributing to the black market.

💡Trickle-Down Economics

Trickle-down economics is a theory that suggests tax cuts for the wealthy will eventually benefit the lower-income groups by stimulating economic growth. The script references the economic policies of Ronald Reagan, who cut tax rates significantly, as an example of this theory in practice.

💡Economic Expansion

Economic expansion refers to a period of increasing economic activity in an economy, often characterized by growth in GDP, employment, and investment. The video cites the strong economic expansion in the US during the 1980s as a result of tax cuts, illustrating the potential positive outcomes of such policies.

💡Income Inequality

Income inequality is the uneven distribution of income within a population. The script mentions that the economic policies of the 1980s in the US led to increased income inequality, indicating that while some segments of the population benefited, others were left behind.

Highlights

India's Prime Minister Modi aimed to eradicate black money but has faced challenges 10 years after demonetization and GST reforms.

Gold smuggling has seen a 65% rise, with a significant amount of gold seized at Ahmedabad customs indicating a trend across India.

RBI reports a 102% increase in fake 500 rupee notes, suggesting counterfeit currency remains a problem post-demonetization.

A large black stock market operates in India with an estimated daily trading volume of 0.7 lakh CR rupees.

Tax is identified as a root cause linked to smuggling, black markets, and crime in the Indian economy.

Reducing and rationalizing tax rates in India is suggested to attract higher investments and promote a transparent tax system.

A historical example from the 1970s shows high tax rates leading to the rise of black money and empowering the underworld.

A hypothetical scenario illustrates how high taxes can lead to tax evasion and benefit the underworld at the expense of the government.

Dubba trading, an illegal practice outside stock exchanges, contributes to the growth of black money.

High brokerage fees and taxes on trading can push investors into the black market to avoid costs.

The US economic policy under Reagan, which included significant tax cuts, is presented as a case study.

Reagan's tax cuts were followed by a period of economic growth, falling inflation, and reduced unemployment.

The downsides of Reaganomics include increased income inequality, national debt, and trade deficit.

A theoretical approach suggests a 'sweet spot' for taxes exists to balance economic activity and government revenue.

Lessons for India include the need to decrease taxes to reduce black money, ensure wealth trickles down, and be cautious with import duties.

The unpredictability of economic reactions to tax policies is highlighted, emphasizing the complexity of economics.

A call to action for citizens to understand the complexities of taxation and its impact on the Indian economy.

Transcripts

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

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money November

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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

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to our Channel thank you so much for

watching I will see you in the next one

bye-bye

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