If broader welfare without a tax hike sounds too good to be true in a country where people live longer and give birth to fewer babies in an era of slow economic growth, it probably is.
Taking office two years ago with the promise of more social welfare, President Park Geun-hye said she will dig up the underground economy for tax revenue and eliminate unnecessary spending to finance welfare programs, such as child care, college tuition support and a pension plan for seniors.
So far, the government has done little to show results.
Considered too unrealistic by many economists from the outset, and even questioned by her own party, Park's welfare goal may be derailed as her administration comes under growing pressure for a tax overhaul to meet growing demand for a better social safety net.
The government came under fire for its clumsily patched year-end tax adjustments that resulted in several tax deductions and other tax breaks being scrapped, diminishing the amount of tax refund for salaried workers and, in some cases, forcing them to cough up more. Officials defended the new system as having been designed to "collect less, return less," but taxpayers blamed the government for tweaking the tax code to deliberately raise the burden on the middle class.
The government apparently lost the argument. President Park's popularity rating dipped to a record-low 29 percent last week.
The extra cash from the tax refund may be small in amount, but coming after a sharp surge in tobacco prices and the ongoing push for residential and auto tax increases, the strong resistance forced the finance minister to apologize and the tax office to return part of the taxes retroactively, the first such move.
The tax refund fiasco is just one example of mixed challenges faced by Asia's fourth-largest economy, which is struggling to strike a balance between a budget shortfall and rising welfare costs from the rapidly increasing elderly population.
Now nearing the midpoint of her single, five-year term, Park needs to make a critical political decision: raise taxes or discard welfare pledges, experts say.
"People were enraged because they felt the government lied about not raising taxes," Shin Yul, a political science professor of Myongji University, said. "Welfare without tax increase was not a realistic goal from the beginning. If the government does not acknowledge this simple fact and sticks to its oxymoronic pledge, it would result in an early lame duck."
South Korea's tax rate is equal to 20 percent of the gross domestic production, lower than the Organization for Economic Cooperation and Development average of 25 percent, while its public welfare budget is just half of the OECD average at 10 percent of the GDP.
The local tax office collected less money than planned for the past few years, with the deficit last year estimated at over 10 trillion won ($9.2 billion). The National Assembly Budget Office estimated the shortfall could reach around 3 trillion won this year.
Grappling with a prolonged economic slowdown, the government has tried to scale back public pension and fix health insurance, but there is scant progress yet in reaching consensus.
Experts say unless Park can start to get the pension system under control, Korea's debt will continue to balloon over the next decades because the welfare system cannot be sustained by the shrinking workforce.
South Korea's fertility rate stood at 1.19 children in 2013, below the level needed to support the current population, while the number of people aged over 65 was expected to surpass that of under-14 in 2017, according to Statistics Korea.
"The current pension system was designed decades ago when the economy was fast growing and people had shorter life expectancies. This needs revision to reflect the latest demographic trend and economic situation," said Yoon Seok-myung, a researcher at the state-funded Korea Institute for Health and Social Affairs.
The government employees' pension scheme was launched in 1960, and the national pension system began in 1987.
"Although this system is expected to increase the financial burden on the government down the road, there is little social consensus about reducing payouts to high-income earners or reducing their benefit. Most of the debt burden that goes into filling the pension budget shortage will be passed onto the future generation, who currently do not have voting rights," Yoon said.
The parliamentary budget office warned in November that the national debt would amount to $13.5 trillion by 2060, when the population over 65 is set to triple, if there are no additional tax increases.
Realizing the potential fiscal crisis, the government last year made it mandatory for companies with more than 300 employees to provide retirement plans for staff starting next year.
In light of growing discontent, politicians are reacting to middle-class demands for more substantive social services.
Rep. Yoo Seong-min, the new floor leader of the ruling Saenuri Party, suggested shifting the current system to "medium burden, medium welfare," which provides broader welfare benefits through a higher tax rate than now but lower than the level of European welfare states like Denmark.
"The government needs to change the 'welfare without tax hike' policy. Corporate and income taxes could be also reconsidered from scratch," Yoo said on Monday, pledging to discuss the issue with opposition parties in the upcoming parliamentary session.
In a parliamentary speech on Tuesday, Saenuri chairman Kim Moo-sung also admitted that Park's welfare pledge hit its limit, saying, "It is not right for politicians to deceive people with such words (as no tax increase)."
The two leaders' remarks hinted at a fundamental change in the conservative party's traditional stance on lower corporate tax, while signaling contentious debates with the finance ministry, which has opposed raising taxes in fear of dampening the business environment. On Wednesday, Finance Minister Choi Kyung-hwan reaffirmed the government's policy will be to collect more from unregistered economic activities and cut state spending to implement welfare programs. But he cautiously left room for change, asking for the ruling and opposition parties to make bipartisan efforts to reach a consensus on what to do about taxes.
"The government will first have to collect more from the underground economy and adjust expenditure to foot the bill of welfare programs, without adding new tax codes or revising the rate," Choi said at a parliamentary session. "If that's not possible, (the government) could consider a tax increase as the last option, based on national consensus."
The corporate rate on taxable income exceeding 20 billion won was cut from 25 percent to 22 percent in 2008 under the Lee Myung-bak administration to induce more investment.
The tax break, however, failed to achieve its proposed goal as major business groups used it to stock up on cash instead of spending, not confident about the recovery in the global economy and jittered by prolonged weak domestic demand.
The government had deducted a total of 42.69 trillion won of corporate taxes from 2009-2013, and such benefits went to the nation's top 10 conglomerates, according to a parliamentary report released by Rep. Oh Je-se of the main opposition New Politics Alliance for Democracy.
"The benefit of the tax breaks by the previous administration was concentrated on a handful of big companies, creating an adverse effect of reducing the burden on the rich," Oh said. "The corporate tax cut worsened economic inequality and reduced tax revenues, so it needs to be revoked for fair taxation."
Economists say the debate over welfare policies should be about setting a fair and proportionate taxation to deal with budget challenges while avoiding excessive welfare costs that led to fiscal failure in countries like Spain and Greece.
"It may be hard for South Korea to become a Western-style welfare state in the short term, and a sharp tax hike would face strong backlash from taxpayers," Kim Jin-bang, an economics professor at Inha University, said. "The government should honestly admit that it failed to keep its promise and persuade people to share the burden by making a proportionate system."
For that goal, the government should promptly thrust forward bipartisan legislation, said Lee Young, a finance professor at Hanyang University.
"It may be very hard to raise taxes if the administration misses the golden time. Political parties should continue to discuss revising the tax code because welfare programs cannot be implemented without more budget," Lee said. (Yonhap)
