By Kim Tong-hyung
Park Geun-hye has promised Koreans can have it both ways ― showered with benefits but exempt from taxes.
Too bad her high-profile team of experts at the presidential transition team is failing to provide a magical answer to the question how. A dreadful quandary between increasing taxes and scaling back on campaign vows seems inevitable for the incoming president.
Park, daughter of assassinated military strongman Park Chung-hee, steadfastly insists she is ready to do neither. But her colleagues from the conservative governing Saenuri Party are already admitting that something has to give.
Billionaire Hyundai scion and Saenuri Party lawmaker Chung Mong-joon went as far as to say that Park should liberate herself from the constraints of the elections and their lavish promises last week, raising concerns over excessive spending on welfare.
The comments put Chung at the receiving end of a tongue-lashing from the Democratic United Party (DUP), still reeling from Moon Jae-in’s narrow loss in the December election. However, this didn’t stop Kim Jae-yeon, another Saenuri Party legislator, from joining Chung in advising Park to accept that she can’t deliver on all of her pre-election plans.
Park hasn’t been willing to touch income tax with a bargepole, preferring talks to be kept on reducing the overlap and featherbedding in public spending and pulling up a larger part of Korea’s immense underground economy from beneath the tax radar.
She received an important boost on New Year’s Eve when lawmakers agreed to lower the minimum tax level for interest earned and dividends from 40 million won to 20 million. Income affected by the new rules includes interest gains from savings at all financial institutions and dividend payments from stocks and other investments.
However, no one seems to believe that will be enough to fulfill her needs for a larger purse.
Choi Kwang, Hankook University of Foreign Studies economist and member of the Korean Association of Public Finance (KAPF), believes that Park has been underestimating the cost of her new plans in social policy.
The Saenuri Party says that the Park government would need an extra 15 trillion won (about $14 billion) a year in internal revenue to live up to its promises. Choi believes the real number could be closer to 45 trillion won.
``To come up with the large amount of money needed to support Park’s welfare plans, the government will have to choose between taking on debt, increasing the burden on taxpayers and reducing spending on other items. The first option of issuing bonds, of course, isn’t likely to be considered,’’ Choi said, who criticized the Saenuri Party for its supposed lack of a ``big picture’’ plan.
``The realistic options come down to raising tax rates and reducing deductions, raising utilities and other public service fees, privatizing government-held assets and managing spending reductions,’’ he added.
The KAPF estimates that the country has room to generate an extra 10 trillion won a year from income tax and could make another 10 trillion won by raising taxes on alcohol, cigarettes and gasoline.
Raising the value-added tax rate from the current 10 percent to 12 would also bring in an additional 10 trillion won. Restoring comprehensive real estate taxes on expensive homes and eliminating deductions will combine for an extra 5 trillion a year.
However, it would be hard to get more than 5 trillion won from the efforts to reduce the underground economy, which would be a difficult job considering the large self-employed population and the deep-rooted culture of tax dodging, according to the KAPF’s calculation.
Among the series of commitments on public spending Park made before the Dec. 19 vote, the plans to raise the old-age pension to 200,000 won a month has been the most controversial. Currently, people over 65 are receiving 97,000 won a month except for the richest 30 percent who don’t receive a pension.
Park not only plans to double the payment but also convert it into a universal benefit. The Saenuri Party says that would cost the country 19.7 trillion won over the next four years. This represents a dramatic difference from the 39.4 trillion won estimate presented by the state-run Korea Institute for Health and Social Affairs.
Park’s other welfare-related campaign pledges involve strengthened state spending on childcare and public education and expanding healthcare coverage. These are all part of Park’s ambitious and largely unspecified plan to increase the proportion of middle-class families to include 70 percent of all households during her five-year presidency.
This would obviously require improving the living standards of families on the wrong side of the widening wealth gap. To smooth the process, Park says her government will have to provide a financial jolt of 135 trillion won, or 27 trillion won per year.
Critics say that coming up with 135 trillion won without raising taxes would be sheer fantasy but, at least for now, the Saenuri Party insists on proving them wrong.
``About 60 percent of that 135 trillion won could be provided by improving the current system of welfare benefits and reducing spending on infrastructure. The other 40 percent will come from improvements in internal revenue, such as the adjustment in income tax and the expected efforts to reduce the underground economy,’’ said Saenuri Party Supreme Council member Lee Hye-hoo in a radio interview Saturday.