Black money & looking for a solution: What an 'inclusive' state must do
'Cash is neither black nor white but circumstances make it so' is an appropriate description. And the principal determinant of status is whether the tax due on the transaction that generated the cash has been paid or not.
The fundamental cause, therefore, of the generation of 'black' money is the reluctance of economic agents to pay due taxes.
The obvious motivation behind this is human greed combined with an assessment that the benefits of not paying tax exceeds the costs of getting caught.
This in turn implies a degree of inefficiency in the tax administration system - the nonpayment will not be noticed - and/or an element of corruption, whereby if noticed, the transgression will not be penalised as per the rules on payment of a bribe, which shall be only a percentage of the total amount of tax and penalty due.
The story, however, does not end here. Despite the fact that the state has been defined as the institution with a 'monopoly over legitimate violence' in a physical territory and society, the relationship between the citizen and the state extends beyond fear of legitimate violence, efficiently implemented.
A social contract
A significant element of the social contract in the context of a democracy, is the commitment of a legitimate state to protect and serve and for dutiful citizens to obey its legal demands including demands for taxes to finance its multifarious activities.
Such an 'inclusive' state (to use the terminology popularised by Professors Acemoglu and Robinson in their Why Nations Fail - the Origins of Power, Prosperity and Poverty) is one with power distributed broadly in society and the use of state power - including legitimate violence - subject to constraints.
The state ensures law and order, the dispensation of justice, public services, and equal opportunity and positive incentives for all citizens to progress and prosper and to pay their legitimate dues to society including taxes.
In an 'extractive' state, on the other hand, motivation to be a good citizen are weaker. State power is concentrated in a narrow elite and is relatively unconstrained and arbitrary. Public services are poor, justice is difficult and very expensive, and opportunities are limited to the ruling elite. 'Extractive' states do not good citizens make.
A matter of taxes
Shifting from studies of development and institutions, political and economic, to tax administration reforms, we find a striking similarity in points of view.
A look at the 'First Report of the Tax Administration Reforms Commission'(TARC) submitted on 30 May 2014, to the Ministry of Finance is revealing.
The TARC has observed that 'taxpayers services must comprise the first focus of a tax administration' and these services must be 'designed to improve the experience of taxpayers with the tax departments'.