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[Editorial] Cash under the mattress

50,000 won bills being hoarded for tax evasion

Fewer high-denomination bills are returning to the Bank of Korea, as President Park Geun-hye’s administration is cracking down on the nation’s shadow economy. Moreover, the number of receipts being issued for cash payments is also declining ― another reaction to the tightening tax policy.

These certainly are a setback for the administration, which is planning to collect an additional 27 trillion won in taxes during the next five years by shedding light on underground business activities. The envisioned tax revenue is part of the 135 trillion won that the administration is planning to spend on President Park’s five-year welfare projects.

During the first nine months of this year, the portion of 50,000 won bills returning to their issuer, the central bank, dropped to 48 percent from 59.7 percent in 2011 and 61.7 percent last year ― an unmistakable indication that more of the bills are being kept under the mattress.

The amount of money printed in 50,000 won bills increased to 4.4 trillion won during the first half of this year, up as much as 1.5 trillion won from the corresponding period last year, as the demand for the high-denomination bills soared and their returning rate dropped to around 50 percent. When these abnormalities continued, the central bank went out of its way to call on commercial banks to exercise restraint on the use of the bills.

No less worrisome was a decline in the issuance of receipts for cash purchases. Their number stood at 2.56 billion during the first half of this year, 37 million down from the corresponding period a year ago. The drop, though small, was the first since their issuance was instituted in 2005.

The decline came though more cash was in circulation ― an apparent indication that a growing number of people wanted to hide their transactions from tax collectors. To increase tax revenues, the tax authority had been extending its audits to self-employed businessmen and high-income professionals, such as medical doctors running clinics and self-employed lawyers.

It goes without saying that a nation’s economy gets healthier as underground business transactions decline. But economic experts say the unrestrained use of tax audits, in addition to encouraging underground business activities, tends to discourage even normal business transactions. They say it is better to use incentives than punitive power.

The tax authority is well advised to heed the criticism that it is putting the cart before the horse if it conducts tax audits to meet the preset target for tax revenues, as it does now.
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