By Kim Jae-kyoung
A tax cut plan is one of the iconic policies for President Lee Myung-bak and his administration. Since his inauguration Lee has promised to generate more jobs and revitalize the economy by lowering income and corporate tax rates.
But ironically, the massive tax cut policy designed to encourage businesses and consumers to invest more and spend more has marred his latest “fair society” pledge aimed at giving the same opportunities to the underprivileged, as it has failed to achieve its intended goal, only deteriorating the nation’s fiscal health.
In particular, Lee’ policy has met strong criticism from opposition parties, who claim the tax cuts will only benefit the wealthy and large business groups. In fact, the government has yet to see a trickle-down effect in the economy from a tax reduction.
The tax cut debate is heating up further after Presidential Chief of Staff Yim Tae-hee made it clear last Friday that the government will not withdraw its tax cut plan. His remark comes as an increasing number of GNP lawmakers have called for the withdrawal of the tax reduction plan.
“History shows that a National Assembly, in general, tries to reduce taxes for the people. It is embarrassing that the Assembly is pressing the government to increase taxes and expand spending on welfare,” Yim said.
The main opposition Democratic Party (DP), however, countered that a tax increase is inevitable to protect those reliant on a social safety net. It claimed the government should raise the ratio of taxation against national income to improve fiscal health and secure sufficient revenue for welfare.
At an Assembly hearing Wednesday, DP lawmaker Oh Je-se said, “After the first-phase tax cut, cash holdings at large firms have increased, while investment has stayed in the doldrums and only a few jobs have been created. That’s what Lee’s tax cut policy is about.”
The party insisted that the ceiling on corporate and income taxes should be capped at 22 percent and 35 percent, respectively, even after 2012. The ceiling of income and corporate tax rates are scheduled to be lowered by two percentage points each to 33 percent and 20 percent in 2012.
Experts said that the real problem is not the tax cut plan itself but the government’s inconsistency in policy.
“The Lee administration has continued to zigzag on its key policies. The tax cut plan is a classic example. It seems that the government is pursuing a populism policy without firm philosophy,” Sungkyunkwn University professor Lee Chae-woong told The Korea Times.
“I think that the tax reduction will help boost the economy as long as it is consistent. Currently, only 57 percent of the population pays taxes. The government should also seek ways to expand the taxation base,” he added.
KDI senior economist Koh Young-sun said that the government needs to focus more on tightening rules on exemptions and deductions to increase revenue rather than on cutting taxes.
“It is disputable how much the tax cut contributed to stimulating the economy. However, I think that the government had better avoid additional cuts, with the nation’s fiscal health deteriorating,” he said.
The tax cut debate is not an isolated issue in Korea. U.S. President Barack Obama has pushed for imposing more taxes on the wealthy to increase spending on social welfare but his administration has met strong opposition from the public and the Republican Party. Opposition Republicans won the majority at the House of Representatives in the U.S. mid-term election and pick up seats in the Senate dealing a fatal blow to Obama's presidency.
There is no magic answer to the tax policy. Tax cuts can help stimulate the economy, while tax increases can contribute to improving social stability by giving more benefits to people. What the Lee administration must remember is that whatever policy it chooses, it should implement it with consistency and a firm philosophy.