Arthakranti, an organisation credited with the proposal for demonetisation, had another proposal in their toolkit - Banking Transaction Tax (BTT). This BTT was part of overall economic reforms including demonetisation, etc. proposed by Arthakranti.
You readers will know that I was not opposed to the idea of Demonetisation. Demonetisation is like first step of a process. The success of the process depends on how well the rest of the parts are executed.
But BTT is a different beast all together. The logic of BTT is quite simple, not totally fool-proof but it is not implausible. Yet, India is too big a country to try it out. The case for BTT has to be built from many sides and none of them are in place.
Few months ago, however, we have got the first step of that process. NIPFP released a report evaluating the arthakranti proposal. I got to know of it through a tweet by Niranjan Rajadhyakshya [ @CafeEconomics ]. I downloaded the report and read it.
The report was a good first step. The analysis was more academic and I thought they tested some arguments for and against demonetisation. NIPFP however stuck to academics as rebuttal for BTT. It was a good first effort but a college kid could have done that.
I think to analyse BTT you must look at a feedback-looped simulation of the economy or a industry chain at least. The allowance for adjustment of behaviour cannot be tested directly without accounting for feedback loops. Some parallel thoughts should be given to Flat tax proposals and their impact on tax compliance.
Nevertheless, it is a good read.
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