[Newsmaker] Tax becomes source of division in Korea

The government’s tax revision that was modified after drawing public backlash shows how desperate the Park Geun-hye administration is becoming to find funds for its welfare pledges.

Spending 135 trillion won for equitable wealth distribution over the next four years would require a “big pot” of money that needs to be drawn from its reserve funds by maintaining a budget surplus, funds raised via government bonds, and the business community and the people by levying taxes.

It simply ran out of options, but taxing the working class, the most publicly and politically sensitive area, at a miscalculated income line at 34.5 million won, dividing the top and low earners.

Readjusting it to 55 million won, or the OECD average, for tax increases is not going to ease the ongoing tension over the issue between the government, political circles and the public.

The government not only failed to communicate effectively with the public, especially the working class, of its tax plan, but also failed to take into account other economic factors such as wage growth, consumer prices, standard of living, asset holdings and employment when measuring the taxable income levels, experts pointed out.

Korea’s disposable income along with household debt should also have been carefully examined and considered before coming up with 34.5 million won, or even 55 million won, as groups around those income brackets would still fall into the middle class, not the upper-middle class, with rigid spending power after subtracting taxes and loans.

Slow wage growth over the years was another factor that could not support the government’s tax overhaul proposal.

The fact is the government needs to raise some sort of taxes to secure funds for its pledges.

Some opposition lawmakers called for further tax increases on the rich, or the top 1 percent, while experts opined raising property or gift taxes. But these, too, could face political setbacks as the concerns run deep with the economy.

Increasing income tax, or as the government prefers to say “reducing tax benefits,” of average Korean workers initially with an annual salary of more than 34.5 million won was the last resort that the government had to take to raise capital, regardless of how contentious it seemed.

Taxes have been dropped via deregulatory measures for the corporate sector and for the housing market in hopes of boosting job creation and revitalizing home purchasing transactions.

Already faced with snowballing national debt, the government could issue more bonds but this would come with a consequence of seeing a fiscal deterioration especially when the cyclical financial crisis hits once again worldwide in the near future.

Increasing debt obligations are making it cut back state expenditure to reduce its deficit and achieve fiscal balance in four years.

By Park Hyong-ki (hkp@heraldcorp.com)