Whitening black money
LET me begin with a conversation with a former colleague. He is a professor of history, and came to our campus to attend a seminar on Sufism in Indonesia. After exchanging pleasantries, I was rushing to my class. Suddenly, Bob whispered: "You guys (economists) should return half of my superannuation money back which I lost due to the current global meltdown in the stock market. I will be retiring soon and would blame the economists who made my super worth half now."
I replied: "Bob, it seems you do not know of a saying about economists. If you seek an opinion from a bunch of three such creatures on a problem, they will come up with four alternatives and one would have two contradicting. Economics is a science of making alternative choices. It is up to you, take it or leave it. You people flirt with economists in good times and blame them when in trouble." He smiled and said: "Indeed, you impressed me."
The arguments I put forward below on the subject of whitening black money are one such choice. However, I would not have proposed all this had we been living in normal times. Since we will be thrown into an extraordinary economic turmoil soon, we may have to go for extreme measures devoid of morality and even business ethics to minimise national suffering.
During the recent debate on money whitening the president of the FBCCI proposed allowing alleged black money holders to invest in five-year period government bonds at 7.5% rate of interest. The former finance secretary and adviser, Dr Akbar Ali Khan, recently spoke against such a move.
Dr. Khan made his views clear and offered convincing arguments. He also argued that this measure was allowed in the past but was not taken seriously by the offenders and the response was muted, except during the BNP-Jamat regime.
Certainly, the question is, why would the offenders take such an opportunity again? There is no easy answer. One is, however, convinced that since the president of the business association has been appealing for whitening black money, he has an estimate of the amount of money, which is lying idle.
While, on the ground of business ethics, it is unlikely for an honest government to indulge in such a scheme, economic necessity sometimes compels such a step during a financial crisis. In my opinion, the move certainly deserves consideration, given the present economic conditions globally. There is an extraordinary multiplier effect if such idle money is circulated as legal tender during a period of downturn.
Having said all this, one must be careful about such a compromise and should go for a less sensitive measure to whiten black money. The proposal put forward by the FBCCI has taken the interest of the black money holders only, and encourages impunity.
There must be some penalty imposed in the process to make the move less sensitive from the viewpoint of business ethics. In this regard, instead of a five-year bond with a high rate of interest, I would like to propose an alternative.
Let us devise a tax concession regime for those businesses that want to participate in the whitening scheme. The businesses would be subject to concessionary regressive rate of tax, as one-off measure only, on the amount of money to be whitened. The more the amount declared for whitening the less the tax rate applied (regressive). For example, there will be a maximum tax ceiling available for the amount of money whitened at each stage. Say, for Taka 5 lacs the concessionary tax rate will be relatively higher than for Taka 5 crore. This will make the holders of large money participate in the scheme with increased incentive due to a larger gain they could accrue.
The rate of tax ceiling at each stage could be worked out by the NBR through benchmarking or making it equivalent of the yield of a two-year bond with 5% rate of interest. For example, if he/she wants to whiten Taka 100 with a concessionary tax rate of 10%, the black money holder needs to pay Taka 10 as tax on the undisclosed money. In normal circumstances, he/she would have been paying Taka 20 as tax, if the tax rate were flat 20% for businesses.
If one converts this into a yield with a two-year bond rate of 5%, the cumulative yield would have been a little more than Taka 10. With this approach, the cost-benefit of a holder can be balanced and a solution could be found, keeping the interest of all the stakeholders in the scheme.
The proposal presented above certainly is in crude form. It needs more thought by the NBR and finance ministry officials and should be made clear to the holders of black money. The major attraction of this approach from the NBR's point of view, however, is that it considers only one-off tax concession for the offenders, which has limited revenue implications and has incentives for the large holders of black money to come clean.
The FBCCI must realise that, all over the world, monetary policy has been put on the back burner and, instead, fiscal stimulus funds have been put in place. They must also realise that business cannot eat cake and keep it as well. A tax concession measure is a fiscal solution to the problem, and alleged offenders pay for the wrongdoing while upholding moral values to a certain degree.
The government has limited time for seeking solutions from outside for all the problems it faces. One must remember that, at the end, the buck stops with the honourable finance minister. The nation is looking towards him for direction. As said earlier, one may end up with four solutions by three economists. It is the minister's responsibility to choose one and place it to the cabinet before it is too late.
Dr. Moazzem Hossain writes from Brisbane, Australia.
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