Economy loses growth steam

Tax reform needed to boost consumption

By Kim Jae-won

The economy has lost its growth momentum because the government has no clear directions in its fiscal policies, economists said Sunday.

They said the administration should reform the tax structure to increase revenue and redistribute wealth to low-income families because this was the fastest way to boost private consumption and fuel economic growth.

Strategy and Finance Minister Choi Kyung-hwan vowed to revive the sluggish economy with expansionary policy packages in his inaugural speech in July, but Asia’s fourth-largest economy has seen no growth momentum so far, according to analysts.

They say that the focus of fiscal policy changes too often from revitalizing the economy to corporate restructuring to tax hikes, making economic players confused about what the government is aiming to achieve.

For instance, the finance ministry withdrew its new tax return formula last month, after facing severe criticism from salaried workers who complained that the government targeted their low incomes while cutting the tax burden on big conglomerates.

“The government should reform the structure of tax revenue by increasing transparency in taxation and tapping more sources for tax,” wrote Hyundai Research Institute economist Kim Dong-yeol in a report.

Kim warned the government that the country may follow in the footsteps of Japan which is suffering from a fiscal deficit, if Korean policymakers are reluctant to change its tax structure.

HSBC economist Ronald Man advised the government to reform its tax rate for individuals to ensure redistribution of wealth.

“We analyze changes to the marginal tax rate for individuals and argue that a steeper marginal tax curve is a more efficient tool to stimulate economic activity than further monetary easing, and that it can tame household leverage,” wrote Man in another report.

The HSBC economist said that Korea would gain the most by using a marginal tax curve similar to that in the U.K., when taking into account the associated benefits and costs. He argues that from a benefits perspective, taxes should be lowered most for the poorest households because they are likely to spend more disposable income on consumption.

Under the U.K.’s marginal tax regime, the poorest households would receive the largest boost to disposable income, equivalent to 6 percent of pre-tax income, according to the report. The U.K.’s highest income tax rate is 45 percent while Korea imposes a 35 percent income tax on the richest, said the HSBC report.

The International Monetary Fund (IMF) said that the country needs to reform its labor market by including more women and old people in the workforce. It said fresh momentum needs to be injected in global trade dialogue and labor market reforms.

“Labor market reforms in advanced economies undergoing population aging (e.g., Japan, Korea, and the United States) are underway to raise labor force participation, including that of women and/or older workers,” said the IMF in its report titled “Global Prospects and Policy Challenges.”