Yoon Hints at Shelving Planned Tax Cuts
By Lee Hyo-sik
Staff Reporter
The nation's top economic policymaker has hinted that planned income tax cuts for next year could be scrapped in a bid to bolster shrinking state coffers.
Strategy and Finance Minister Yoon Jeung-hyun told lawmakers Monday that policymakers are seeking to maintain tax revenues in the face of worsening fiscal health, while continuing a range of expansionary policy steps to prop up the sagging economy.
``The government will study the possible reservation of the planned cuts on corporate and individual income taxes next year. A voice to put a hold on the tax reductions, aimed at improving the fiscal structure, is gaining momentum. I think it is worth giving it a thought,'' Yoon said.
In September last year, the government unveiled a 26-trillion-won tax cut package to be implemented over the next five years. Among others, income tax rates for salaried workers and the self-employed will be reduced by 2 percentage points over the next two years and corporate income tax rates by 5 percentage points through 2011.
Yoon's remarks led to big business opposition. They argue that ditching the plan would hurt government policy credibility and discourage businesses from making investments and creating jobs.
``Last year's tax cut scheme was the most comprehensive by far for businesses here. But shelving it will seriously damage the government's policy consistency and trust in the market. Before contemplating the tax increase, the government should make more efforts to spend taxpayers' money more efficiently,'' Korea Economic Research Institute senior economist Cho Gyeong-lyeob said.
Cho said the government's attempt to reduce the tax benefits enjoyed by large companies will dampen already sluggish corporate investment and job creation, which will pour cold water on the slowly rebounding economy.
The government has been seeking to scrap various tax cut and exemption programs benefiting mostly large businesses and high-income earners. The unprecedented global economic slump has forced the government to outspend tax revenues over the past year to finance a range of stimulus measures to boost sluggish domestic demand and the planned tax cuts.
It is planning to leave the tax benefits for low-income brackets and small businesses largely untouched, while abolishing a range of tax reduction and exemption schemes for big companies and wealthy individuals to prevent tax revenues from falling further.
``We will first scrap ineffective tax cut and exemption programs. Among others, we are considering discontinuing a 'facility investment for tax exemption' scheme, which has largely benefited big businesses. We will extensively study the effects of tax reductions on the ongoing economic recovery and financial conditions of low-income bracket and small firms,'' a ministry official said.
The finance ministry plans to unveil changes to the nation's tax system in late August or early September.
To collect more tax revenue, the government is also considering withholding corporate taxes on interest income earned by banks and other financial firms. It may also impose excise taxes on liquor, cigars and energy inefficient consumer goods.
The nation is projected to post a budget deficit over the next five years or more, with the government overspending tax revenue to bolster the sagging economy.
In 2009, the budget shortfall is expected to reach 22 trillion won, in contrast to a 12-trillion-won surplus last year.
According to the finance ministry, it unloaded 81 trillion won during the first three months of the year, up 25.7 trillion won from the first quarter last year, while tax and other state revenues fell by 7.5 trillion won to 68.6 trillion won over the one-year period. Accordingly, the national debt is expected to increase to a record high of 366 trillion won by the year's end.