[THE INVESTOR] The size of South Korea‘s underground economy is equivalent to 10 percent of the nation’s gross domestic product, much higher than they are in other advanced countries, a research paper said on Sept. 19.

Professor Kim Jong-hee of Chonbuk National University, drawing his conclusions from a study of 26 member states of the Organization for Economic Cooperation and Development from 1995-2014, said the scale of the shadow economy in South Korea, an average of 10.89 percent during the measured years, far exceeds the average 6.65 percent of G7 countries, as well as the 8.06 percent for the other 18 member states. 

The amount of tax evasion, at 3.72 percent, was also higher compared with 2.21 percent for the G7 and 3.06 percent for the other countries during the period, according to the paper.

“Underground economic activities induce tax dodging, leading to fiscal deficits and tax hikes for key economic actors to make up for the uncollected taxes,” Kim said in the paper. “It also raises the social cost because the government has to take action against such activities.”

The paper also took issue with South Korea’s tax progressivity of 0.064 percent, which falls lower than the 0.129 percent for the G7 and the 0.159 percent for other OECD countries. The high rate of tax evasion, it said, is undercutting the intended purpose of progressive taxation by reducing the amount of taxes due to the state.

“Taxes serve to ease the income imbalance through progressivity,” the paper said, “But tax dodging can greatly influence redistribution and negatively affect economic growth.”

(theinvestor@heraldcorp.com)