Let's say you are an honest citizen. You earn $1000, of which all of it is properly taxed. You get $100 in cash and give it to a corrupt official in order to do something. Another person is a corrupt official/businessman; under this official, there are maybe 100 people, and each person gives this official $100 in order to get something done. This income is in the form of cash, and is untaxed.

If you force everyone to put their money into a bank, then anyone who pays their taxes already has their $900 in assets accounted for and don't need to pay more taxes. If you have $10,000 in cash you need to deposit into a bank and no documentation for it... you'll have a bad time.

There is no musical chairs, since the money flows upwards. If you are honest, you should not get hit by any additional taxes.

This is the reason why currently most of India supports the move of discontinuing the old currency and replacing it. Unless you take in a large amount over your taxed salary as untaxed bribes, it doesn't affect the amount of money you have.

But what I don't see are measures to ensure that people will continue to deposit money in the banks / pay their taxes. While I appreciate the move to force the turnover of black money now, what stops someone from starting to accumulate black money again, lets say a few months from now?

I hope there are measures being taken in that account.

That's a very valid point, and at the moment, I don't think anything is being done in that regard. However, the difference between the Have's and the Have Not's in India is enormous. Defying-belief levels of enormous. There were reports of people burning suitcases full of money, or just throwing it away in sacks because they couldn't figure out what to do with it. Given this fact, even this first step has the potential of reinjecting a lot of money back into the economy. We have this rule of thumb in India, for instance, that when buying real estate, only about a quarter of the actual price is paid in "white money" (legally) and everything else is under the table. We have a staggeringly bad corruption situation, and I think it's a good first step.

On the other hand, there is something to be said about Joe Public in the emergency ward who cannot afford the fee simply because the ATMs run out of money within hours of being restocked, and he doesn't have the luxury of waiting in long lines. Not sure if the government has anything in place for such a scenario.

Yes. There are. There will be a cap on the maximum transaction that can be done using cash. So cash accumulation gets reduced. And hoarding large amounts of cash in physical notes will be dissuaded.

> There will be a cap on the maximum transaction that can be done using cash.

Thanks, I've been hearing rumors about this too [1]. Would be a welcome step if and when the govt. implements it.

[1]: http://economictimes.indiatimes.com/news/economy/policy/demo...

That could have been done gradually without banning notes. Introducing higher denomination make even more less sense.

> That could have been done gradually without banning notes.

Please correct me if I'm wrong, but banning notes is to bring about a few changes like forcing people to declare black money and fighting the counterfeiting industry (just to name a few). Like you pointed out, the cash transaction limit could have been brought into force without banning the notes, but by combining both, isn't the cap more effective in deterring accumulation of black money in the future?

> Introducing higher denomination make even more less sense.

I don't quite understand this. Higher denomination or not, the cap is on the transaction amount, so how are they related?

1. As per a recent estimate, only 6% of black money is kept in the form of cash [1].

2. 33 Death count as of Nov 18 [2].

3. New notes are just as easy to counterfiet as old ones and now with 2x yield [3][4].

You can make your own conclusions.

PS: If you are aware of any stats/study governmental or independent, please let me know.

[1] http://economictimes.indiatimes.com/news/politics-and-nation...

[2] http://indianexpress.com/article/india/india-news-india/demo...

[3] http://www.hindustantimes.com/india-news/rs-2-000-notes-foun...

[4] http://timesofindia.indiatimes.com/city/ahmedabad/first-fake...

6% is only the official estimate based on IT department raids. In reality, this will be more.

Moreover, if you stub out this 6%, you will arrest leakage of that black money getting converted into land, gold, assets etc.,

See an interesting discussion here, (though this conversation concludes both parties not conceding their point:-):)

https://www.reddit.com/r/india/comments/5cilgj/cash_has_only...

For a good argument in favor of the move, and for a theoretical perspective on this, even in a developed economy with less paper money %, please see Kenneth Rogoff's blog post and also his book - the "Curse of Cash" (I've not read his book though only his posts and tweets on this)

http://blog.press.princeton.edu/2016/11/17/kenneth-rogoff-in...

Thanks. So if I'm not wrong, what you're saying is even with demonetization and a transaction cap, they will barely make a dent in the state of black money in India. Am I correct?

From what I've read, I would agree with that.

Remove "and a transaction cap" part, you are correct.

Going cashless will solve terrorism and counterfiet problem. World is going cashless and naturally India would have gone too without the huge cost of banning notes.

However I have different issue with this, allow me to quote

http://economictimes.indiatimes.com/news/politics-and-nation...

Corruption and black money are a consequence of big government, of one set of individuals having discretionary powers over the actions of others. If Modi was serious about tackling black money, he'd bring about institutional changes that would take us towards the minimum government he had promised in his 2014 campaign. Instead, government keeps getting bigger, controlling more and more of our lives. More government = more corruption.

Also Center/Modi wants to make prosecuting corrupt public officials more difficult and bribe-giving a criminal offence. Considering giving bribe is unavoidable fact-of-life and cost of doing business in India, Center wants to make CEOs responsible [1] [2].

And I say this as someone who voted for Modi.

[1] http://economictimes.indiatimes.com/news/politics-and-nation...

[2] http://indianexpress.com/article/india/india-news-india/brin...

The size of the government is not the deciding factor.

Example is Denmark with one of the largest governments in the world but still among the countries with lowest corruption.

> The size of the government is not the deciding factor.

For India it is. Its that simple.

What do you suggest Indian Government should do to reduce corruption while still holding same power if not increase it ? Laws & executions have failed consistently. It wont be different this time.

Corruption is a social problem with huge momentum. It took a while for it to creep in and it will take a while to creep out (like all social problems).

Reducing unneccessry regulations and red tapes are only quick fixs we have.

I am not sure I agree completely but you do have a point.

In addition to what others have mentioned:

Part of this is teaching people to USE banks. A comparison would be how a lot of westerners don't understand how credit cards work and just think they'll get into huge debt. Then they use one and realize it simplifies life and is easy to maintain

But it sounds like there are follow-up actions planned. The President (?) of India is rumoured to be expected to give everyone 100 bucks worth of rupees next year as a "Sorry for the inconvenience" celebration with the stipulation that it goes into a bank account.

And I suspect there are a lot more steps planned. Likely benefits to using direct deposit rather than being paid in cash and other options.

A lot of tax evasion is because of the complexity of Tax code. If you are in Mumbai and if you are selling an assembled PC you have to pay around 10 different taxes and 2 cess.

The NDA government has finally come up with GST which will replace majority of these taxes while making the tax compliance significantly easier.

The current sweep has increased the risks for keeping lot of cash in hand FOREVER. Just like how 9/11 has changed the air travel forever. I already see the trends where people are now focusing more on Gold, Hawala, Casinos and other means of investing their cash.

(Reply to be deleted)

> what stops someone from starting to accumulate black money again, lets say a few months from now?

This is exactly what I've been concerned about. There's a high chance of acceleration in corruption in next few months to a year. There are no working solution that prevents corruption in the first place.

Indian logic, in a nutshell.

Thank you, that explanation worked better than mine. You pretty much hit the nail on the head.

Except Govt is making more harder to prosecute corrupt public officials. See my other comment here [1].

[1] https://news.ycombinator.com/item?id=13012515

They aren't charging a tax on cash. But if you exchange a large amount of cash, they will look up your past income tax records and if it doesn't line up with the amount of cash you have then you get taxed.

Indian has a problem with large hoards of cash being used to evade taxes. This is basically a come to Jesus moment for tax evaders with these hoards.

It is a pretty crazy policy, but this article glosses over some major points.

There are plenty of folks who think that the US should phase out $100 bills and Europe should phase out €500 bills for essentially the same reason: they are used primarily by people trying to do very large transactions in an untraceable way, which has big overlap with money laundering, drug deals and other illegal purchases, tax evasion, etc.

Most day-to-day cash transactions work perfectly fine using $20 bills.

See e.g. https://www.washingtonpost.com/news/wonk/wp/2016/02/16/its-t...

> [...] illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.

80% of US currency is in $100s[1]

The ECB is getting rid of the €500 note[2]

[1] http://www.npr.org/sections/money/2014/08/14/340356790/shoul...

[2] http://www.nytimes.com/2016/05/05/business/international/ecb...

> they are used primarily by people trying to do very large transactions in an untraceable way

And ? I don't want my large or small transactions traced, monitored and monetized upon the untouchables called banks and I don't understand anyone who agrees with this but otherwise supports freedom and anonymity in tech.

The whole thing is just an excuse for more control.

Using $20 bills wouldn’t make your all-cash transactions impossible. It would just make e.g. tax evasion, drug purchases, money laundering all a bit more cumbersome and conspicuous.

The burden would fall heavily on illicit transactions, while only slightly impacting most cash users, if at all.

(I’m not advocating for this, merely linking it as topical to the discussion.)

See Ken Rogoff’s NBER paper http://scholar.harvard.edu/rogoff/publications/costs-and-ben...

Quiet a lot of Europeans buy cars in cash why not ban private ownership of gold and silver coins while your at it as well.

You mean like this?

https://en.m.wikipedia.org/wiki/1933_double_eagle

Poor example. The government produced a coin and then ordered all of them melted down but 2. When 20 showed up, it is clear they were stolen and the government claimed their property. As a tax payer, I think this is a good idea.

Most importantly it will discourage the culture of bribing.

This move is just one of many steps. Let me first establish the context and list the other pieces (as I understand them):

> India recently executed / implemented a nationwide biometrics id scheme which has now allowed the govt. to create bank accounts for a very large fraction of the population that previously didnt have access to banking.

The untaxed / cash based transaction system has distorted multiple facets of the Indian society and economy: from vote buying to a distorted realty market. This also blocks investment. When 20% of your net economy is sitting in closets, it is a large wasted opportunity.

> Apropos the fragmented tax system, the Indian parliament finally passed a monumental tax reform pack (first proposed by the opposition parties when they were in power and then opposed by BJP, the current dispensation in power, but I digress).

> This bill, among others moves the country to a digital transaction / electronic payments based tax & transaction system.

> The govt has clearly established a desire (and has now demonstrated the will) to move towards an electronic payment / transaction system, the benefits of which are obvious, especially in terms of minimising pilfering of welfare money, etc. (The national ID scheme now allows for direct cash transfers without middlemen, corruption, etc.)

(You can see where this is leading..)

86% of the Indian currency is high value (denominated in the ₹500 and ₹1000 notes that have now been banned).

The govt has stated that the new high denomination notes that are being issued will not replace the entire 86% in physical cash. It will be a smaller fraction.

This does two things:

a) people who deposit old currency notes will now, perforce, have to move to electronic / card based transactions.

b) it forces individuals to declare their "black" or untaxed money and also move to the electronic payments system.

So, I think this move helps significantly since it is part of a larger push towards electronic transactions etc. In conjunction with the changes in the tax system (and expected / anticipated reduction in income tax rates / increase in exemptions), this move, while painful in the short term, is potentially transformative for the Indian economy and society.

like your name

Thanks :)

>> They are punishing the person who lost at musical chairs or am I missing something?

There was an amnesty window leading up to this. Until Sept 2016, all black money could have been deposited in bank accounts in India, no questions asked, taxed at usual income rates.

The people suffering now are the ones who took the Indian Tax system for granted.

>> How does this prevent it from happening again with the new notes? Tax system is still broken.

Fear of losing more than half your net-worth again.

The tax isn't on cash. It's just regular tax - sales tax, or income tax, for that matter. Some businesses pretty much run on cash payments. That way, they can store the cash physically, and not pay tax on it. The "crackdown" is to basically ensure that this happens no longer. The intentions behind it seem to be good (from my limited viewpoint), but I guess the implementation could have gone better.

Exactly.

There are rumors of bigger and more hard-hitting changes by the Govt. down the line, but yes, as it stands now, the system is still broken.

This measure attacks the STOCK of black money that has accumulated over decades. Govt also needs to attack the FLOW of black money, and those changes are coming soon.

Genuine question, any official sources about the changes that are coming soon?

This government has always been pretty tight-lipped about upcoming changes. Decisions are made, directives are sent to the appropriate governing bodies, and then public statements are made. It's a refreshing change from the past.