By Yoon Ja-young
The dispute over the year-end tax settlement has pulled down the approval rating of President Park Geun-hye to an all time low of 30 percent. Salaried workers who will appear to have to pay more taxes after the year-end tax returns settlement have turned their back on her.
President Park stressed during her election campaign that she would realize “welfare without a tax increase,” but experts say it is time for her to be frank and talk about welfare and tax.
Professor Kang Byung-goo of Inha University points out that the country’s welfare spending will inevitably increase with the aging of society.
“To sum up, Korea is in a state of ‘low burden, low welfare.’ Its overall socioeconomic condition, such as low birthrate, aging, and polarization, however, makes an increase in welfare spending inevitable. We can’t avoid the question of how to fund this,” he said.
Despite the President’s promise that there would be no tax hike, the government has de facto been increasing taxes, Prof. Kang points out.
For instance, those earning 20 million won or more from interest or dividends are now subject to the “comprehensive financial income tax,” while it was previously levied on those earning over 40 million won.
The highest income tax rate is now applied to those earning 150 million won or more, while previously it covered those earning 300 million won and over. The government also raised the cigarette tax.
“The government was de facto raising taxes, but it kept insisting on ‘welfare without a tax hike.’ However, taxpayers realized that they are paying more taxes. A dishonest government caused the catastrophe over the year-end tax settlement,” Kang said.
Park Jong-kyu, a senior research fellow at the Korea Institute of Finance, said salaried workers are angry because their household economy hasn’t improved during the past seven years.
“The country has been in ‘wageless growth.’ The real wage hasn’t increased. They wouldn’t have reacted so sensitively to the tax increase if their income had been increasing.”
Salaried workers have de facto been shouldering more tax, with their effective tax rate rising by 0.46 percentage points from 2008 to 2013. It contrasts with the effective corporate tax rate, which decreased by 3.58 percent during the same period.
He said the President should first explain how her idea of “welfare without a tax hike” was to be realized. She suggested that cracking down on the underground economy and restructuring government spending can realize this.
“The government thus had a tax investigation and it also restructured budget spending. People want to know how much tax income was secured through this or why it still falls short of the target. Then there should be talks about welfare and how to fund it.” Park said.
Prof. Kang said the government should be frank.
“It should explain to people the fiscal conditions, and that welfare spending is bound to increase. It should tell taxpayers that the burden should be shared,” he said. “If the government had open and official discussion over this in the first place to seek their cooperation, the middle class would have accepted it even though they would pay more taxes.”
He also points out that the government hasn’t been fair in allocating the tax burden.
“While the government was criticized for raising taxes paid by workers, it is insisting that it will never raise the corporate tax rate,” the professor said. The corporate tax rate was lowered during the previous Lee Myung-bak administration to 22 percent from 25 percent. The opposition party is demanding the readjusting of this first.
Prof. Kang said that the government should raise this first and then request the middle class to shoulder more. “Tax reform should be fair. As it was focused on the working class, it is meeting fierce opposition.”
Park said there should also be consensus on how much welfare we need. “Even if we cut general welfare, spending will increase,” he said.
He stressed that people should also be realistic, instead of being coaxed by the candy ― the welfare pledges.
“Take the college tuition cut pledge for example. That may be welfare for the parents, but that will be a burden for the future generation. It’s the same with free school meals,” Park said.
He pointed out that even the national pension can dry up. “That is the most basic system of welfare which should be sustainable for those who are now in their teens and 20s. We should reach a consensus over which welfare policies get priority.”
He said the controversies like the one over year-end tax settlement will continue if the country doesn’t take it as an opportunity to mend overall welfare, tax and fiscal policies.