By Yoon Ja-young
President Park Geun-hye pledged to expand social welfare programs without raising taxes, but an increasing number of critics are saying it is time to talk about raising taxes amid growing concern over the fiscal deficit.
The critics accuse the government of being "obsessed" with the idea that it should not raise some kinds of taxes ― specifically, corporate taxes ― while at the same time the government is increasing the tax burden on the working class.
"To cope with the aging of society and its economic polarization, social welfare spending cannot but increase," said Professor Kang Byung-goo of Inha University. "It is time to reform the tax system and expand tax income."
The government plans to raise taxes on cigarettes and commercial vehicles, as well as the residential tax, but the professor said these changes would impose a disproportionate burden on the working class.
"Compared with other OECD countries, taxation in Korea is less effective in redistributing income," he said. "The government should instead try to levy more taxes on those with high incomes and assets, such as conglomerates."
Concern over fiscal deficit
According to the 2015 budget announced by the government, the country will see a 34 trillion won fiscal deficit next year, the biggest in six years.
Strategy and finance minister Choi Kyung-hwan, however, has made it clear that there will be no tax hike.
"The Japanese economy is slowing down after the consumption tax hike," the minister said at a meeting with senior journalists Wednesday. "If we raise taxes enough to affect consumption and investment, it could shock the economy."
However, some ministers think differently. Security and public administration minister Chong Jong-sup said the government should raise taxes.
"Apart from taxes, there is no way to increase social welfare benefits except by issuing government bonds," he told reporters Thursday. "People can be lured in by the idea that welfare will be provided without a tax hike, but the funds have to come from somewhere. There is no way other than by paying taxes."
Need to raise taxes
Some economists agree that the government should raise taxes in the long run.
"If we know the financial deficit will systematically increase under the current structure, there needs to be a tax hike," said Park Jong-sang, a researcher at the Korea Institute of Finance.
The government says Korea is in relatively sound fiscal condition compared with other developed countries, but economists say the country needs to take heed.
"Korea isn't like the United States, the European Union or Japan," said Kim Hak-soo, a research fellow at the Korea Institute of Public Finance (KIPF). "It can't increase the fiscal deficit indefinitely.
"Korea is externally vulnerable, and there is also the North Korea issue. It should always try to secure fiscal soundness," he said.
Cho Gyeong-lyeob, director of the Public Policy Research Division at the Korea Economic Research Institute, said now was not the right time to raise taxes.
"A tax hike negatively affects the economy," he said. "If the government raises taxes right after announcing diverse policy measures to revitalize the economy, it will result in contradictory policies. There should be consistency."
Even so, he said the government should devise ways to fund the diverse social welfare programs that President Park Geun-hye included in her campaign pledges.
"The way they are funded will have significant effects on the economy," Cho said. "The government should carefully coordinate the timing of the tax hike, etc."
Who should shoulder taxes?
Economists differ as to exactly where the government should raise taxes. However, they agree that the country offers too many tax exemptions and tax breaks.
"More than 40 percent of the people don't shoulder taxes at all due to these loopholes," Cho said.
"I think it is right to raise direct taxes such as income taxes and corporate taxes," said an economist at a state-run think tank who refused to be named. "A more pressing issue than that is that too many people evade taxes in Korea, though they have money."
He said the government should focus first on designing a better taxation system to collect taxes from those tax dodgers.
He also supported the cigarette tax hike.
"In terms of economic effectiveness, taxes on those causing negative external effects, such as a cigarette tax and an environmental tax, are good areas in which to raise taxes," he said.
Professor Kang, meanwhile, says that conglomerates have more room to shoulder additional taxes. He points out that while the corporate tax rate is about the same as the OECD average, Korean companies are shouldering only small contributions to social security programs, such as the national pension and health insurance programs.
"If we consider contributions to social security programs as de facto taxes on businesses, the total corporate tax burden is very small compared with other OECD countries," he said. He added that the conglomerates were also enjoying trillions of won in tax exemptions and deductions.
"Still, they don't invest as much as the government expects," he said.
Most of all, the government should persuade people and build a consensus on a tax hike.
"To benefit from welfare programs, one should also shoulder the costs," Cho said.
KIPF's researcher Kim said the ratio of income taxes to GDP was below 4 percent in Korea, while it hovered close to 8 or 9 percent in welfare states.
"People are extremely sensitive about tax hikes, though they want to see the expansion of social welfare programs," he said. "It is difficult to implement policies under such conditions."