Govt. in dilemma over tax reform

By Yoon Ja-young

While the government is preparing revisions of the tax law next year, debate is heating up regarding where it should raise more taxes. Experts say society should come to a consensus on the issue as the country will need more taxes to fund the increasing demand for social welfare.

Some lawmakers of the opposition parties submitted tax code revision bills aimed at raising the corporate tax rate from the current 22 percent to 25 percent. The corporate tax rate was slashed from 25 percent during former President Lee Myung-bak’s administration and the opposition bloc wants it returned to the previous level. Pointing out that the tax cut hasn’t had the desired effect on the economy, they explain that the hike would increase the government’s tax income by around 3 trillion won, which would help with funding the snowballing welfare costs.

However, President Park Geun-hye recently said she is against a tax hike. Regarding demands that corporate taxes should be raised, the President said, “I think a tax hike should be the last resort. The best way would be to vitalize the economy, which would prompt businesses to make more investments and thereby increase the taxable income for the government.”

The government and the ruling Saenuri Party decided not to include a corporate tax hike in the tax code revision that will be announced next week. They fear that a corporate tax hike can lead to an exodus of businesses out of the country. “There is global competition going on to cut corporate taxes. The economy will be vitalized only when the corporate competitive edge is enhanced,” said Hyun Jin-kwon, director of the Center for Free Enterprise.

Also at the center of the debate is who should shoulder the income tax. It stems from the fact that too many workers are exempt from taxes. According to statistics, 48 percent of the workers aren’t paying any income taxes here. The ratio, which stood at 32 percent in 2012, soared to above 48 percent following the tax revision aimed at lessening the burden on the working class. The ratio of those exempt from paying taxes is much higher than Japan’s 15.8 percent or Germany’s 19.8 percent.

Kim Jae-jin, a senior fellow at the Korea Institute of Public Finance, said the ratio of those exempt is too high.

“In other words, it means that the rest are shouldering excessive tax burdens. As the constitution says it is the duty of the people to pay taxes, it is right to decrease the number of people who are exempt from paying taxes thus making more people shoulder the burden,” he said.

Strategy and Finance Minister Yoo Il-ho also said at a parliamentary hearing in January that the number of workers exempt from paying taxes should be slashed. The view was echoed by the National Assembly’s special committee on budget and accounts, which reported that “the surging ratio of workers exempt from paying taxes is hurting the sources of taxation and thus negatively affecting the government’s tax income.”

However, the government fears it will face strong resistance from the public. Experts advise that broadening sources of taxes should be accompanied by a tax hike on those who have high incomes.

“Korea’s tax policy is very weak in lessening income disparity. It is time those in charge should discuss raising the tax rate on high incomes,” said Park Jong-kyu, a senior fellow at the Korea Institute of Finance.

Currently, Korea applies a 38 percent tax rate on those making more than 150 million won in annual income.

While conservatives are stressing that there should be no exception in taxes and progressives demand the wealthy shoulder more taxes, experts agree on one thing, that the government should raise more taxes from somewhere.

“Unless the government prepares measure to raise more taxes, it is doubtful whether it can sustain the increasing welfare demand,” said Kim Sang-kyum, a professor at Dankook University.

“The government has been raising taxes passively, such as by decreasing tax exemptions or tax deductions or by raising cigarette consumption taxes. However, more aggressive tax expansion will be inevitable,” he said.

Kim at the Korea Institute of Public Finance said that society should make a consensus through continuous discussions.

“There are diverse ways to increase taxes, but everybody has a different idea. There is no tax policy supported by all people. The decision should be based on the will of the people,” he said.