Following is the second in a series of stories featuring economic issues facing the Park Geun-hye government which was inaugurated on Feb. 25. ― Ed.


With President Park Geun-hye sworn in as the country’s 18th chief executive Monday, her administration’s first economic task as important as the North Korean nuclear issue in diplomacy is restructuring the tax system to secure a budget to finance welfare.

As pledged during her campaign as well as during her inauguration speech where she said she aims to create a “second miracle on the Han River,” like her father, former President Park Chung-hee, by promoting the happiness of people, her government is not expected to increase rates on various tax sources.

If her father achieved fast economic growth through industrial and infrastructure investment, the president seeks to create the second Han miracle by spurring job growth through investments in welfare, and science and technology.

Park would move to lessen tax benefits or breaks, as well as adjust the tax structure in accordance with the income groups, conglomerates, and small and medium enterprises, as mentioned by her chief economic advisor Cho Won-dong.

The Ministry of Strategy and Finance has begun looking into the matter by launching a committee to gain 48 trillion won ($44.4 billion) through tax reforms.

President Park seeks to spend some 135 trillion won over the next five years in office for welfare expansion to boost the livelihoods of the low and middle income families and encourage birth as the Korean economy faces negative factors weighing its growth sustainability, such as the aging population, low birth rates and lack of quality jobs.

Its substantial welfare budget is being questioned of its feasibility, but Park’s administration seeks to secure this by exposing the underground market, the rich and big companies that illicitly channeled their money into overseas tax-haven markets.

The National Tax Service and the Korea Customs Agency are set to be mobilized further with their investigative teams expanding to target tax dodgers.

New taxes could be introduced such as a version of the “Tobin Tax,” coined from the Nobel Prize laureate James Tobin, who introduced the concept of tax levy on financial transactions for market stability in the 1970s when barriers to capital flows had been deregulated, causing high volatility.

Foremost, Korea’s purpose of Tobin Tax is to safeguard the foreign exchange market, which is vulnerable to external macroeconomic conditions such as the debt crisis in the eurozone and easy-money policies by advanced economies. Also, Japan’s recent policy promoting a weak yen has posed a systemic risk to the Korean economy, which highly depends on exports for growth.

This could also “generate greater tax revenue” for President Park’s welfare promise, said Travis Cho, fixed-income strategist at Woori Investment & Securities.

However, the downside of the Tobin Tax in the form of a currency transaction tax, in addition to the existing so-called “three sets of financial taxes” on bonds, derivatives and foreign currency liabilities, is that it could lead to contraction and increase volatility.

“Bearing in mind the potentially grave side effects of various financial transaction taxes ― including the threats of drastic financial market contraction and sharply expanded volatility ― the Korean government is unlikely to make any haste towards enacting any such system,” Cho said.

Analysts said that the Korean government is likely to adopt this tax system in the financial market after closely monitoring the global trend, especially in the eurozone where it also seeks to regulate capital flow and increase taxes on the financial community through its own Tobin Tax, and the won-dollar exchange movement.

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