Doubts Persisting on Tax Reduction Plan
By Yoon Ja-young
Staff Reporter
Strategy and Finance Minister Kang Man-soo pledged a tax cut to encourage corporate investment and boost the economy. The cut, however, is adding to the concern of snowballing government debt. Some even doubt whether the move will boost the economy as much as expected.
``Korea's tax burden ratio, which stood at 22.7 percent last year, is higher than neighboring competitors. We will continue to pull down the ratio to around 20 percent by 2012,'' Kang said at a meeting with tax commissioners held in downtown Seoul, Friday.
Kang said the corporate tax rate will be slashed at the National Assembly in June, and added that there will be a major overhaul on the tax system.
President Lee Myung-bak administration, which holds ``business friendliness'' and ``small government'' as its motto, pledged to cut taxes ranging from corporate to income and inheritance. The measure, which will increase disposable income for businesses and individuals, is expected to increase investment and consumption, thus boosting the economy.
However, some economists are raising concerns over the snowballing government debt.
The former President Roh Moo-hyun administration had been attacked for the growing debt. The per capita national debt recorded 6.16 million won as of last year. The government debt is expected to grow even further even if the tax burden ratio is maintained at the current level.
Korea Institute of Public Finance warned that the fiscal balance will turn into deficit in 2020, due to the aging population, expenditure on North Korea and increasing demand for social welfare services. The ratio of the state debt to the gross domestic production will increase to surpass 100 percent in 2050. These calculations are based on the estimation that the tax burden ratio will be maintained at the current level. If the tax rate is cut as the ministry pledges, it will accelerate the coming of the deficit.
``Japan and the United States, which have a tax burden ratio that is slightly higher than Korea, maintain a small tax burden by resorting to state debt,'' said a spokesperson at the center for tax reform, a leading NGO.
He said the cut will boost the economy, but the effect will be very small. Around half of both salaried workers and self-employed don't pay any income tax as their income is below the tax exemption limit. The tax cut benefits high-income people, but their consumption isn't likely to be affected. The inheritance tax cut affects even fewer people. Only 0.7 percent of inheritors were subject to the tax. The fiscal deficit caused by the tax cut, meanwhile, is very evident
The center for tax reform said the government should set up measures for fiscal stability first. ``Instead of the corporate tax cut, improvements on corporate management surroundings is more important. A massive cut on income tax ratio is not good either when considering the importance of income redistribution,'' Korea Institute of Public Finance said in a report.