Like a bee in the bonnet, the proposal in the draft budget for fiscal year 2024-2025 (FY25) to whiten black money after payment of income tax at the rate of 15 per cent has created a buzz in the media and among analysts that has superseded all other criticisms. That the reaction to the proposal would elicit such a virulent response was predictable because it is not the first time this has happened. Knowing that this is going to be ‘unpopular’ with the vocal section of the population, the decision to go ahead with the proposed amnesty for holders of black money speaks of the desperation of the government to collect revenue from every possible source. It may also be a strategy to bring unaccounted for money from the economy that has come to have the monikers of shadow, parallel, underground and black economy. Since behind most of the vitriolic remarks by critics appears to be the assumption that the holders of black money are corrupt individuals and as such corruption would be rewarded by the proposal, it may be helpful for the discussion to shed some light on the sources of black money
Black money is earned from various sources that elude law of the land and rules and regulations regarding production, sale and distribution of goods and services and through rent seeking, all of which remain outside the tax network because of evasion. While almost all of these sources involve production and sale of goods and services illegally, the last viz rent seeking makes no value addition in the economy at the time of ‘earning’ and siphons off money from others, misusing power and influence. Since income from all these sources evades tax payment they are termed as ‘black’. It should be pointed out that black money may result from both legally and illegally earned income when tax is not paid. Illegally earned money is kept out of tax payment to keep the sources secret lest punitive actions are taken by government law enforcers. Earners of income through legal means may resort to under-reporting with a view to paying less than the tax due. Among the earners of income through illegal means are smugglers, black marketers, drug traffickers, human traffickers, adulterers, hoarders and last but not the least hired killers. The rent seekers, on the other hand, who sponge off legal and illegal income earners belong to government servants, politicians in power, student leaders and staff of local government institutions who engage in extortionate collection of subscriptions or protection money. There may be exceptions in each category but the exceptions serve to prove the rule. The diatribe against the proposal to whiten black money in the proposed budget is mostly directed at the earners of black money through rent seeking as explained above. Given the bad name to the country in the global corruption index under successive governments, the exasperation of the critics over the proposal to whiten black money is understandable. But in finding fault on this account a distinction has to be made between black money earned through rent-seeking (corruption) and from other sources. Though some estimates have been made about the size of the shadow/ black economy, the figure (as percentage of the GDP) has not been disaggregated according to their sources as classified above. But the total size, as revealed in the studies, may lend some justification for the fiscal measure to tap this ice- berg like source for tax collection to augment the fiscal space. A modicum of insight into the murky world of the black or shadow economy through an overview may be helpful for further discussion
TYPES OF BLACK ECONOMIES: According to researchers there are three types of black economies: (a) the illegal economy; (b) the under-reported economy; and (c) the unrecorded economy.
The illegal economy consists of income produced by activities pursued in violation of laws defining the scope of legitimate forms of commerce. Extortion, toll collection, drug dealing etc are part of the illegal economy. The unreported economy seeks to evade the institutionally established fiscal rules as codified in the tax code. Under-the-table-employment and untaxed private transactions that are otherwise legal fall in this category. The unrecorded economy refers to economic activities that circumvent the institutional rules defining the reporting requirements of government statistical agencies. This can be due to deliberate concealment of information for legitimate or illegitimate reasons or due to practical difficulties associated with data collection.
KEY TAKEAWAYS: The key takeaways from discussions and analyses by economists of black money in recent years in a nut shell have been the following:
(i)The black economy includes all economic activity in a given economy that occurs outside or in violation of the prevailing laws and regulations of a country; (ii) Individuals may break or ignore the rules imposed when governments intervene, tax or regulate markets. This can produce net benefits in some cases (making scarce goods available) or costs to society as in the case of drug trafficking; (iii) Activity in the black economy is often illegal ,usually untaxed, and rarely recorded by official economic statistics. In fact, the activity may not consist of formal market transactions at all, making it very difficult to estimate.
HOW DOES THE BLACK ECONOMY STAY HIDDEN: Because tax evasion or participation in a black market activity is illegal, those who engage in such behaviour often attempt to conceal their activities from government or regulatory authorities. Black economy participants traditionally choose to transact their illegal activities in cash, since use of cash does not leave a footprint. More recently, crypto-currencies have opened up new possibilities for payment, particularly over the dark web. Different types of underground activities are distinguished according to the institutional rules that they violate.
HOW BIG IS THE BLACK ECONOMY IN BANGLADESH: Officially no estimate has so far been made by government regarding the size of the black economy. According to newspaper sources, during the discussion with the IMF review mission last month the concerned NBR officials reportedly mentioned that 30 to 40 per cent of Bangladesh economy remain outside the formal economy, accounting for Tk 136 to Tk.180 billion. Instead of using the term ‘black money’ this was euphemistically described as ‘unaccounted for money’ by them. The possibility of tapping this source might have been discussed with the IMF review mission but nothing can be said on this with certainty. But there is the precedence of taxing black money and declaring amnesty on this after bringing the black money within the formal economy in the recent past .Though the move was vehemently opposed by analysts and extensively commented on in the media, the government went ahead with the policy initiative with regard to black money. Instead of riding roughshod over objections raised this time, the government should expatiate the rationale for legitimising the illegitimate wealth. It should, if there are grounds available, argue that it is not immoral at all to allow whitening of black money and neither the policy proposal is meant to condone corruption. This two-fold argument can become all the more potent if an idea is given about the size of the black economy. As everyone knows, when a predatory animal is not identified as dreadful in a recognisable form, attempts to restrain it with tools in hand lacks conviction for the general public, not to speak of the knowledgeable section.
A research paper by an official of the ministry of finance, government of Bangladesh on the subject was made public through the official portal of the ministry in 2011. Though it is not fully an official document, its release through the official channel confers on it a semi-official status. In this research paper the author has pointed out that the underground economy in Bangladesh was only 7 per cent of GDP in 1973. By 2010 the size of the black economy rose to account for as high a percentage as 62.75 per cent of GDP. The researcher based his study and arrived at his estimate using the model by Tanzi (1980, 1983) after some modification to fit into Bangladesh case. He used currency demand method including Tanzi’s model, building upon regression models with multiple time variables. The Currency Demand Approach assumes that tax is the main variable impacting on the size of the black economy and that holders of black money use currency to avoid paying taxes. The main assumptions underlying the Currency Demand Approach are: (i) velocity of illegal money equals the legal money; (ii) the velocity of illegal money equals to the velocity of narrow money (M1) and (iii) velocity of illegal money equals to the average velocity of legal money and narrow money. It is under assumption (iii) that the size of black money was estimated by the researcher at 62.7 per cent of GDP in 2010 (Sk Towhidul Haque, Underground Economy of Bangladesh— An Econometric Analysis, 2010)
Friedrich Schneider, an European economist estimated the black economy of 110 countries in 2004 including developed, developing and emerging economies using Currency Demand Approach and dynamic multi- factor and multi-variable (MIMIC) approach for estimating the range of the shadow economy. His findings show that Bangladesh had a shadow economy equal to 28.4 per cent of GDP during 1990-90, 32.4 per cent during 1997-99 and 35.6 per cent during 1990- 2000 periods.
Kabir Hassan, another Bangladeshi economist, used an econometric model in 2008 to estimate the underground economy and analysed its impact on government fiscal position, particularly on allocation of resources in the aggregate economy. He used both the Currency Demand Approach and the Dynamic Multi- factor and Multivariate (MIMIC) method. According to the Currency Demand Approach he found the shadow economy in Bangladesh averaging 20 per cent during 1975-2008 but on the basis of the MIMIC approach his estimate of the black economy stood at 29 per cent of GDP in 1996 and 46.60 per cent in 2004.
The historical trend of the underground economy/black economy in Bangladesh under different approaches shows that the size under UGDPM3 in FY 2000 was 37.24 per cent of GDP which is consistent with the findings of Schneider (2004). Under UGDPM3 the underlying assumption is velocity of illegal money equals to the average velocity of legal money.
Though the findings of the empirical works on the black economy varies in details because of the differences in assumptions and econometric models used, the size has been shown to increase dramatically from the early seventies to early 2000, averaging over 30 per cent of GDP.
LEGALISING THE BLACK MONEY: Assuming that roughly 50 per cent of the black money has been laundered abroad, the remaining 50 per cent amounts to a hefty size (Tk.136-Tk180 billion, according to the unofficial estimate by NBR disclosed informally to the visiting IMF mission recently). The question that begs for an answer is what are the costs and benefits of this hidden money being legalised?
The first objection raised by critics of the proposed amnesty is on grounds of ethics and morality. Declaring amnesty to black money holders is considered immoral by many as it encourages corruption and discriminates against the honest tax payers, according to them. The judgement on this debate, however, will depend on what terms the facility of amnesty is being offered. If the terms are punitive in nature (taxes to be paid by black money holders at a rate higher than the rate at which honest tax payers pay taxes) and puts a ceiling on the amount that can be made legitimate ( a maximum of say, Tk 10 crore allowed to be whitened), then the logic behind the criticism about immorality can be removed. But the budget proposal to legalise black money after payment of 15 per cent income tax, with no ceiling of the amount that can be whitened does not satisfy this requirement to obviate the morality issue. This has to be done to assure honest taxpayers that they are not being discriminated through preferential treatment of black money holders and to send the message to the denizens of the underworld that amnesty for ill gotten money comes with the price tag of a penal rate of tax and a ceiling of the amount that can be made white. If this modification is not made to the proposal to legitimise black money, the government cannot extricate itself from the moral bind in which it finds caught now.
The moral argument against amnesty has to be nuanced and not absolute. It cannot be argued that black money per se is out of bounds of the formal economy. Benefit-cost analysis of taxing black money with a ceiling has to be compared with the scenario where it is kept out of the formal economy under all circumstances as a matter of policy. If the amount of money represented by the black economy is as big as even the most conservative estimate puts it, foregoing the tax revenue on this will mean a high opportunity cost that a cash strapped government can ill afford. Allied to this is the benefit of addition to investment in legal sectors. After the morality argument is taken care of satisfactorily, economic cost-benefit analysis of legalising black money should be front and centre of policy making. As of now very little by way of addressing the morality argument and pointing out the cost- benefit comparisons has been made by policy makers.
An economist of global repute while discussing morally as an ideology melded it with utility of utilitarianism and wrote: ‘ A society cannot exist unless its members have common feelings about what is the proper way of conducting its affairs’. (Joan Robinson, Economic Philosophy, 1963). Perhaps her words are as relevant today as they were when written.
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