Korea has seen a gradual decline in its black market, conversely raising transparency. The national prestige and brand power will thereby be upgraded as the underground economy slows down.
The Korea Tax Institute reported undocumented trading accounted for 17.1 percent of GDP in 2008. This is a noticeable fall from 23.7 percent in 2000, 28.7 percent in 1990 and 62 percent in the 1970s. If the trend continues, Korea will be one of the few nations where the unregistered economy accounts for less than 10 percent of GDP. The latest data show that Korea is probably ahead of Belgium, Spain and Italy in economic transparency. Just five years ago, the country was ranked fourth in the OECD in the weight of the black market in the economy.
The real-name trading in financial and property contracts, along with a wider use of credit and debit cards have contributed to the thinning-out of the shadowy economic base.
Statistics alone does not indicate the decline of the black market. People can feel greater transparency in society and the economy. The computerization of government and private services has left little room for unregistered and shady transactions. A series of crackdowns on large enterprises has also greatly contributed to the weakening of the black market.
The recent withdrawal of a few Cabinet appointees testifies to the increasing transparency in society. Even technical mistakes in tax returns have embarrassed nominees at the National Assembly confirmation hearings. The tax office has strengthened the monitoring of capital flight to avoid domestic taxes.
Korea still has a way to go before reducing the gray economy to the level prevailing in such countries as the United States and Japan. The underground economy of the two countries is less than 10 percent of GDP.
The institute said income tax evasion linked to the underground economy amounted to about 29 trillion won or 3.1 percent of GDP. It advises the government of promoting an even wider use of debit and credit cards.
However, the government is moving to phase out income tax deduction for card payments. So far four of every 10 salaried people or 5.7 million have enjoyed the benefit. The removal will be an additional tax burden of 1.2 trillion won for wage earners. This elimination might go against reducing black market activity. Policymakers say the phase-out is unavoidable from 2013 to generate tax revenue.
Policymakers should bear in mind that the scrapping of this incentive will lead to a reduction in overall tax revenue as people may revert to cash rather than credit and debit cards. Shop owners may offer discounts when customers do not pay by card.
Rather, the logical solution is to aim to collect more from undocumented trading rather than getting rid of the tax deduction for card users.