In a meeting with senior journalists last month, President Park Geun-hye reiterated her objection to increasing taxes, saying she would lose face if she mentioned it. She may well feel so, given her insistence on financing expanded welfare programs without raising taxes.
But a growing number of fiscal experts consider a tax increase inevitable since it is difficult to cover welfare costs by restructuring government spending as the Park administration has tried to do. Amid a prolonged economic downturn, it will be increasingly difficult to expand revenue sources, they say.
President Park Geun-hye (Yonhap)
Park may find it harder to stick to her stance under the changed political climate following the April 13 general election, in which her conservative ruling Saenuri Party suffered a crushing defeat. During the election campaign, opposition parties, which combined secured a parliamentary majority, pledged to raise the maximum corporate tax rate from the current 22 percent to 25 percent.
“The election outcome can be partly viewed as voters dismissing the probability of enhancing welfare without any tax increase,” said Ahn Chang-nam, a professor of Kangnam University. He suggested it is time to actively discuss tax hike.
The Korea Development Institute, a state-run think tank, has raised the need to increase taxes, cautioning against the possibility of the country’s fiscal soundness being deteriorated to a dangerous level not before long.
In a report published last year, the institute proposed considering a sequence of reducing tax breaks, expanding social security contributions and increasing the rates of income, consumption and value-added taxes. If kept unchanged, the current fiscal framework would be sustainable as welfare spending is set to continue to rise with the country’s growth potential and revenue basis weakening amid a declining population, it noted.
According to the report, Korea’s national debt as a percentage of gross domestic product should be kept in the 50-70 percent range by 2060 in order to ensure its fiscal soundness. To that end, the ratio of its tax revenues to GDP, which stood at 24.6 percent in 2014, needs to be further raised, it suggested. The figure was far below the 34.4 percent average for the 34-member Organization for Economic Cooperation and Development.
In a separate paper released Monday, the Korea Institute of Public Finance raised the need to increase the rates of income and value-added taxes.
Many ruling party lawmakers have taken sides with President Park in opposing a tax increase. Experts in support of raising taxes also remain cautious on hiking corporate tax rates, which they say would result in dampening corporate investment and thus hampering economic revitalization.
The government collected 45 trillion won ($38.6 billion) in corporate tax last year, up 2.3 trillion won from the previous year. Levies paid by companies in the January-February period was 53 percent higher than those in the same period of 2015.
Song Won-keun, an FKI official, said the actual tax burden on corporations has become heavier than before the latest corporate tax rate reduction in 2008 with a range of tax benefits given to them being slashed.
In a survey of 50 economists, released Monday by the Korea Chamber of Commerce and Industry, 72 percent said corporate tax rates should be frozen at the current level, with 12 percent arguing they should be cut further in keeping with the global trend.
But opposition lawmakers pushing for corporate tax hike note that measures taken by the previous administration under President Lee Myung-bak to cut levies on corporate profits have not resulted in companies increasing investment only to let them sit on huge piles of cash reserves. In the wake of last month’s election results, some ruling party legislators have tilted toward raising corporate taxes.
Experts worried about the negative impact of corporate tax increase argue that it is important to change the taxation scheme in a way not to harm the country’s growth momentum. They say priority should be given to cutting or scrapping a complex set of tax breaks for both companies and individuals.
Lee Man-woo, professor of business management at Korea University in Seoul, emphasized the government should be bolder and quicker in correcting the taxation system to increase revenues without raising tax rates.
Lee, member of a commission tasked with reviewing government-proposed tax code revisions, said it is undesirable for nearly half of the country’s 15 million wage earners to remain exempt from the obligation of paying taxes.
Many experts note political parties should go beyond a narrow-sighted wrangling on corporate tax rates to get the incoming parliament to take the initiative in galvanizing a debate on how to increase revenues while avoiding weakening growth momentum.
By Kim Kyung-ho (khkim@heraldcorp.com)
