Steps needed to sustain healthy fiscal balance
The Ministry of Economy and Finance unveiled a package of measures aimed to overhaul the current tax system on Thursday. The Yoon Suk-yeol administration's first tax reform bill, awaiting passage by the National Assembly, features expansion of corporate tax breaks for businesses and a wide range of tax adjustments for many people. It is designed to help promote investment and spending and revitalize the sagging national economy.
For starters, the corporate tax ceiling will be lowered to 22 percent of earnings from the current 25 percent to alleviate managerial difficulties facing enterprises and boost their investment and job creation. The nation's corporate tax rate is higher than 21.2 percent, which is the average among OECD member countries. Both the International Monetary Fund in 2017 and the OECD in 2018 advised the Korean government to lower the corporate tax ceiling.
Income tax, which has remained intact for more than 10 years, will also be curtailed to lessen the burden on salaried workers. For instance, workers who earn between 46 million won ($35,000) and 88 million won per year are currently subject to a 24 percent tax rate. Yet, the lower end will be raised to 50 million won. The ministry explained that a salaried worker with an annual income of 78 million won will enjoy a tax cut of 830,000 won. A 6 percent tax will be levied on up to 14 million won annual income, up from the present 12 million won.
The threshold for the comprehensive real estate tax will be raised from the current 600 million won to 900 million won. Taxation on financial investment income and cryptocurrencies will be suspended for two years, despite the earlier plan for its implementation next year. "We have decided to take bold taxation measures to help stabilize the people's livelihood and stimulate the national economy," Finance and Economy Minister Choo Kyung-ho said in a briefing.
The envisioned tax cut is expected to boost consumption and inject fresh air into the economy. What matters, however, is that it takes considerable time to see such a positive cycle take hold. What is worrisome is the possible fallout arising from the potential tax reduction. The tax overhaul will likely cause a 13 trillion won decrease in state tax revenue. This means the government needs to tighten its belt further in budget spending.
Prompted by the pork-barrel populist policies adopted by the previous Moon Jae-in administration, the national debt has snowballed to surpass 1,000 trillion won from 660 trillion won in 2017. The portion of state debt to GDP also exceeded 50 percent. Furthermore, Yoon needs to carry out his presidential campaign pledges which require 209 trillion won over the next five years.
The government will need to spend more to help low-income people who are vulnerable to soaring consumer prices and high interest rate coupled with the resurging COVID-19 pandemic, despite the prospective dwindling tax revenue. The recent tax reform has triggered a reaction from the main opposition Democratic Party of Korea (DPK) with regard to the lowering of corporate tax on businesses and various benefits for the wealthy.
The Yoon administration should double down on efforts to promote a healthy fiscal balance. For one thing, it needs to focus on renovating the public enterprises and organizations regarding their insolvent managements in terms of personnel, wages and apparatus. It also should induce cooperation from the DPK, which is holding a big majority in the Assembly. Large companies should proactively respond by making brisk investment and creating decent jobs as they will be the biggest beneficiaries from the proposed tax overhaul.
The Ministry of Economy and Finance unveiled a package of measures aimed to overhaul the current tax system on Thursday. The Yoon Suk-yeol administration's first tax reform bill, awaiting passage by the National Assembly, features expansion of corporate tax breaks for businesses and a wide range of tax adjustments for many people. It is designed to help promote investment and spending and revitalize the sagging national economy.
For starters, the corporate tax ceiling will be lowered to 22 percent of earnings from the current 25 percent to alleviate managerial difficulties facing enterprises and boost their investment and job creation. The nation's corporate tax rate is higher than 21.2 percent, which is the average among OECD member countries. Both the International Monetary Fund in 2017 and the OECD in 2018 advised the Korean government to lower the corporate tax ceiling.
Income tax, which has remained intact for more than 10 years, will also be curtailed to lessen the burden on salaried workers. For instance, workers who earn between 46 million won ($35,000) and 88 million won per year are currently subject to a 24 percent tax rate. Yet, the lower end will be raised to 50 million won. The ministry explained that a salaried worker with an annual income of 78 million won will enjoy a tax cut of 830,000 won. A 6 percent tax will be levied on up to 14 million won annual income, up from the present 12 million won.
The threshold for the comprehensive real estate tax will be raised from the current 600 million won to 900 million won. Taxation on financial investment income and cryptocurrencies will be suspended for two years, despite the earlier plan for its implementation next year. "We have decided to take bold taxation measures to help stabilize the people's livelihood and stimulate the national economy," Finance and Economy Minister Choo Kyung-ho said in a briefing.
The envisioned tax cut is expected to boost consumption and inject fresh air into the economy. What matters, however, is that it takes considerable time to see such a positive cycle take hold. What is worrisome is the possible fallout arising from the potential tax reduction. The tax overhaul will likely cause a 13 trillion won decrease in state tax revenue. This means the government needs to tighten its belt further in budget spending.
Prompted by the pork-barrel populist policies adopted by the previous Moon Jae-in administration, the national debt has snowballed to surpass 1,000 trillion won from 660 trillion won in 2017. The portion of state debt to GDP also exceeded 50 percent. Furthermore, Yoon needs to carry out his presidential campaign pledges which require 209 trillion won over the next five years.
The government will need to spend more to help low-income people who are vulnerable to soaring consumer prices and high interest rate coupled with the resurging COVID-19 pandemic, despite the prospective dwindling tax revenue. The recent tax reform has triggered a reaction from the main opposition Democratic Party of Korea (DPK) with regard to the lowering of corporate tax on businesses and various benefits for the wealthy.
The Yoon administration should double down on efforts to promote a healthy fiscal balance. For one thing, it needs to focus on renovating the public enterprises and organizations regarding their insolvent managements in terms of personnel, wages and apparatus. It also should induce cooperation from the DPK, which is holding a big majority in the Assembly. Large companies should proactively respond by making brisk investment and creating decent jobs as they will be the biggest beneficiaries from the proposed tax overhaul.
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