45 Pages Posted: 12 Jul 2011 Last revised: 4 Apr 2012
Date Written: July 12, 2011
In the present economic system, most of the money in circulation is in physical form (bills/notes). There are reported to be plenty of cases of lootings, robberies, homicides, extortions, ransoms, and bribes across the world in almost all nations because of this huge money in physical form. This physical money, in huge amounts, is being transferred from one hand to other eluding all tax nets in transactions of commodities/goods or services. The unaccounted GDP is said to be too heavy and varies from country to country depending upon the corruption level exists in that country. In addition to this black money there are also huge amounts of fake currency that has contaminated the genuine currency. The combined effect of the black money and fake currency is playing havoc with economies of many countries. In the present economic system money is being treated as an income generating asset and wealth instead of using it as medium for exchange of commodities, goods, physical and intellectual work. The huge accumulation of money in few pockets in the form of black money is making the cyclic circulation of money in the economic system to be erratic (some times more cycles per year and some times less cycles per year with stagnation/non usage of money) causing economic recession at times. The multiplier effect on the money in banking finance system is decreasing the real face value of the physical currency. Although the individual’s earnings are increasing every year, the purchase value of the currency is decreasing and reached almost 1/10th of its face value. TOP Tax system tries to fix this problem by qualitative and quantitative supply of money in economic system so that the purchase value of physical currency at its face value remains high and same for longer period of time. The prices of commodities or services will remain same or even decrease enhancing the purchasing capacity of people every year with increase in earnings (per capita income) each year.
In the suggested new monetary system, most of the money (96.6%) will be in dematerialised form in the accounts of citizens, Governments and companies. Only small portion of money (0.4%) will be in physical form (cash) i.e. coins or notes at low denomination. Money transfers will have to be carried through in dematerialised form from one account to another account towards all purcases of goods/commodities or services, donations and gifts in place of money transfers evading all tax nets in physical form in the present economic system.
The parallel economy being run by black money almost equalling the accounted GDP of the country and an estimated Rs. 1, 60, 000crore fake currency will be totally eradicated with the demonetisation of higher value currency notes (Rs 1000, 500, 100, 50 notes) in the suggested TOP Tax system paving way for corruption free society.
So there will be no generation of black money and fake currency, and accumulation and stacking of money in physical form (cash) will not be possible. Money will be constantly pumped back into the system so as to avoid Profit Tax. The circulation of money in the economic system will be at constant rate with more cycles while checking inflation even at higher growth rate. The more cycles or exchange of money more times means money is spread evenly reaching all people. TOP Tax system would also arrest illegal activities such as drug trafficking, and arms trafficking. Once launched into this TOP Tax system prices would continue to decline to reach a minimum level of ¾th and further up to half level of the present prices due to the following factors namely, low tax component (below 11%), low interest rates (3% per annum), no tax compliance costs and fully open market with more players in the business. Money will be purely utilised only for exchange of goods, commodities, assets, services, physical and intellectual work. When the TOP Tax system reaches its final destination, the prices of commodities/goods or services include only the value/cost of manpower (physical/intellectual) where abundant raw materials are available. In the present system the prices of commodities/goods or services include various components like raw materials cost, tax, profit, interest, corruption, tax compliance cost, man power (physical/intellectual), transport, power (fuel/electricity) and shelf life. The final result of TOP Tax system will be the achievement of perfect equilibrium between demand and supply; development and equality; growth and inflation; real money and credit money (loaned money); revenues and expenditure; The lopsided development among people and regions that is being witnessed in the present system will cease to exist. The natural resource and wealth of a country can be equally distributed among the people.
Keywords: New monetary system, limited paper currency, dematerialised money, money supply, fiscal policy
JEL Classification: E43, E51, E62, F41, G21, H21, H24, H26. H51, H52, H53, H55, H61, H71
Suggested Citation: Suggested Citation