Did Modi really kill black money in India? : Economic case study
Summary
TLDRThis 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
- ๐ Despite Prime Minister Modi's agenda to eradicate black money, issues like gold smuggling and fake currency persist in India.
- ๐ 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.
- ๐ผ 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.
- ๐ค The connection between tax structures and the underworld is exemplified by how tax evasion can empower criminal enterprises.
- ๐ฆ 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.
- ๐ High transaction costs and taxes can push investors towards the black market, known as 'dubba trading,' to avoid fees and taxes.
- ๐บ๐ธ The Reagan-era tax cuts in the US demonstrated that reducing taxes can stimulate economic growth, but also had downsides like increased income inequality.
- ๐ The 'trickle-down effect' suggests that tax cuts for the wealthy can lead to reinvestment and job creation, benefiting the broader economy.
- ๐ก The Indian government must find a 'sweet spot' in taxation that balances revenue generation with preventing the growth of black money and smuggling.
- ๐จ Increasing taxes without ensuring a trickle-down effect can exacerbate wealth disparity and may not benefit the economy.
- ๐ 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
๐ฆ 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.
๐ 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.
๐ 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.
๐ 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.
๐ 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.
๐ก 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.
Mindmap
Keywords
๐กBlack Money
๐กDemonetization
๐กGST Reforms
๐กSmuggling
๐กCounterfeit Currency
๐กBlack Stock Market
๐กTax Structure
๐กDubba Trading
๐กTrickle-Down Economics
๐กEconomic Expansion
๐กIncome Inequality
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
in order to make guy Baba happy and for
more such insightful business and
political case studies please subscribe
to our Channel thank you so much for
watching I will see you in the next one
bye-bye
[Music]
[Music]
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