State budget planners are struggling with the thorny task of meeting an increase in welfare spending amid a growing shortfall of tax revenue. Their work has been made more difficult by the demands for more expenditure on public safety in the wake of the Sewol ferry disaster in April, which claimed more than 300 lives.
According to recent data from the Finance Ministry, the government collected a total of 74.6 trillion won ($73.9 billion) in tax through April this year, which accounts for about 34.4 percent of its estimated revenue of 216.5 trillion won for the year. The proportion was below the corresponding figures for 2012 and 2013, which remained at about 40 percent and 35 percent, respectively.
Financial experts predict the yearly revenue deficit will grow from 8.5 trillion won last year to 10 trillion won this year, with the economic upturn held back by sluggish domestic consumption following the ferry disaster and the rapid appreciation of the Korean currency against the U.S. dollar. Tax collections below the target may well deepen concerns that it will probably be impossible to finance expanded welfare programs promised by President Park Geun-hye during her 2012 election campaign and various measures needed to ensure public safety.
Given these circumstances, it is understandable that Finance Ministry officials are pondering a range of means to increase tax revenue in their ongoing work to draft a tax code revision that may be implemented next year. Under intense deliberation is whether tax benefits granted to companies and individuals. Should be cut or eliminated. The ministry drew criticism last year when it attempted to include some measures to increase the burden on the middle class in the amended tax code. Ministry officials are pushing again for reducing income deductions on credit card payments, which they withdrew from the 2013 tax code.
There may be the need to review all options to increase tax revenue to fill the widening shortfall. But it would be more desirable to leave the current benefits for credit card use intact, and focus on cutting or eliminating tax breaks for large businesses. With the amount of additional revenue not so big, reducing credit card deductions could result in a substantial burden on middle and working-class households, further dampening consumer spending.
It is the right direction to eliminate tax breaks for corporate investments deemed to help create new jobs. The scheme, which was introduced in 1982 on a temporary basis, has outlived its purpose, annually giving more than 1.8 trillion won in tax savings mainly to big businesses, which are already hoarding large amounts of cash. Instead of this, taxes should be raised on such cash reserves held by major companies to prod them to invest more and increase wages for their employees.
The government needs to introduce other tax schemes to reduce the widening income inequality by placing more of the overall tax burden on big corporations and the wealthy. It should also strengthen efforts to regulate the underground economy and crack down on tax evasion, which would help expand the revenue base. When these measures yield tangible results, it will be easier to persuade middle-income earners to pay more tax.
Some pundits suggest the need to raise the rates of corporate and value-added taxes in a fundamental way to settle the revenue shortage problem. The government is right to be cautious about such revenue-raising rate hikes, which would hamper the economic recovery.
Reducing wasteful expenditure by both central and regional governments is also essential to meet fiscal demand without increasing the burden on taxpayers. Thorough measures should be taken to evaluate the appropriateness and cost effectiveness of state-funded projects.