Undoing tax cuts

Policy shift needed to ensure fiscal health

It is disappointing to realize that the governing Grand National Party (GNP) lacks an appropriate and transparent decision-making process. The latest case in point is a flop over whether to retract tax cuts scheduled for 2012. It was irresponsible for a GNP spokesperson to announce a plan to reconsider the cuts Wednesday morning and then deny it in the afternoon.

The episode shows how poorly the party’s policymakers have behaved to reverse President Lee Myung-bak’s massive tax cut policy designed to encourage businesses and consumers to invest more and spend more. Since his inauguration Lee has promised to generate more jobs and revitalize the economy by lowering income and corporate tax rates.

Lee’s policy has met strong criticism from opposition parties that the tax cuts would only benefit the wealthy and large business groups. In fact, the government has yet to see a trickle-down effect of the tax reduction on the economy. So, there has been a growing need for cancelling any further tax cuts, especially since the global economic crisis.

Even, an increasing number of GNP lawmakers have felt the need. On Tuesday, GNP chairman Rep. Ahn Sang-soo disclosed a plan to revise the party platform to change its ideological base from center-right conservatism to “progressive centrist conservatism.” He promised to allow all income brackets except for the top 30-percent rich to enjoy more welfare benefits.

In this context, the GNP leadership was pushing for the withdrawal of the scheduled tax cuts. (The ceiling of income and corporate tax rates are to be lowered by two percentage points each to 33 percent and 20 percent in 2012.) However, it had to flinch from its attempt because of hard-line party members sticking to the original plan.

Ahn and other GNP policymakers were blamed for hastily letting the spokesperson unveil their move to repeal the tax cuts without obtaining a consensus within the party. If they really want to undo the cuts, they should first change the party line by reflecting the diverse opinions. Then, they have to hold close consultations with the presidential office and the Cabinet.

It is also important that the GNP should seek the understanding of the people about a sudden change in its policy. Besides, it is necessary to explain why the party and the government have tried to slash the tax rates without considering the fiscal capacity. One positive aspect of the fracas is that the party leadership is recognizing potential ill-effects of the tax cuts and attempting to do away with them.

The state debt surged to 407 trillion won this year from 365 trillion won in 2009 and 309 trillion won in 2008. The tax cut plan could worsen the debt problem. Now, the GNP and the Lee administration must work together to map out measures to ensure fiscal soundness. One of the possible steps is to go without additional tax reduction.