Value context and insight. lkm@koreatimes.co.kr
Debate heats up over tax hike
Deputy Prime Minister and Finance Minister Hong Nam-ki, center, speaks during an emergency economic meeting at the government complex in Gwanghwamun, Seoul, Friday. He said that the government can realize a tax hike only when there is a national consensus.
By Lee Kyung-min
Long-term approach needed to bolster economic recovery
By Lee Kyung-min
The debate is heating up over a possible tax hike to cope with the rapid increase in government debt following its drafting of three extra budgets ― at a cost of some 60 trillion won ($49.7 billion) ― to deal with the economic woes exacerbated by the COVID-19 pandemic.
Experts say a mid- to long-term approach is required amid a rapidly aging society, due to a spike in social welfare spending for the elderly and adjusting a “disproportionately” heavier burden on high income earners and large corporations compared to the situation in economically well-to-do OECD member countries.
Most of them agree the politically unpopular issue cannot be left unaddressed as demand rises for government spending due to the economic uncertainty brought on by the drawn-out U.S.-China trade feud severely compounded by the virus-initiated suspension of economic activities following lockdowns and social distancing.
Yet the top priority remains keeping the economy from crashing further via quickly mobilizing all possible emergency relief packages, a shared recommendation from seasoned economists that are well aware that “prevention is better than rebuilding from scratch.”
Mounting debt
According to the Ministry of Economy and Finance, the third extra budget of 35.3 trillion won together with the first (11.7 trillion won) and the second (12.2 trillion won) amounts to 59.2 trillion won in additional spending for 2020.
The three extra budgets will raise government debt to 840.2 trillion won, pushing up its debt-to-GDP ratio to 43.7 percent, up from 41.4 percent a figure that incorporates only the two previous extra budgets.
As a result, the finance ministry forecast that the nation's consolidated public fiscal balance will post a deficit of 76.4 trillion won, the largest the ministry has ever reported since it began doing so in 1979.
The consolidated balance, one of the key barometers measuring national soundness, is the sum of tax revenue and returns from public and social fund management, after subtracting total state and regional spending.
Ministry data released June 9 showed that the central government collected 100.7 trillion in tax between January and April, down 8.7 trillion won from a year earlier. This contrasts sharply with the 209.7 trillion won spent in the same period, up 13 trillion over the same period.
'Spending impossible without collecting'
The idea was first floated by state-run Korea Development Institute (KDI) Macroeconomic Analysis and Forecasting Director Jung Kyu-chul and Korea Institute of Public Finance (KIPF) President Kim Yu-chan.
“Korea will see demand for social welfare spending soar in the coming years. A comprehensive mid- to long-term strategy to identify taxable income is a subject we cannot avoid, especially given the fast-rising government debt as of late,” the KDI economist said.
The KIPF president said a tax hike of between a quarter and up to half of the expected increase in government spending will induce a “clear economic spurring effect,” which he says will help “equal shouldering” of the newly imposed burden following the pandemic.
Kim said the tax hike pushed simultaneously with fiscal spending will help increase the transfer of income earned by low income earners and help bolster government consumption and investment.
Yet while most other economists say the issue itself deserves in-depth analysis, they say bringing it to the fore amid an economic crisis is ill-timed.
“The timing cannot be any more inappropriate,” former Financial Services Commission Chairman Jun Kwang-woo said.
Government policy is all about timing which is why in his view more attention should be paid to reducing taxes to help firms stay afloat amid the unprecedented shock, not to increasing the tax burden.
“The rising debt is of course a problem but not as an immediate one compared to people's lives being shattered and firms falling apart due to the new coronavirus. Policy priorities should be more about time-sensitivity,” he said.
Hyundai Research Institute (HRI) Economy Deputy Director Ju Won echoed the view. “It's all about economic recovery now. Hiking taxes is an issue that should not be neglected, but pushing for it now seems rather out of touch with reality. When the issue is brought to the fore some time later, raising value-added tax would be proper rather than corporate or income taxes.”
Korea Economic Research Institute (KERI) economic policy team head Hong Sung-il said the increase in government debt can be more than offset by labor reform and deregulation.
“Working people as well as corporations will be sapped of motivation, if their hard work and corporate profit ― the key factors that drive them to work hard ― end up being taken by the government. Businesses will be disinclined to make investments which will lead to lower-than-possible output, hurting the country's economic competitiveness.”