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Finance Ministry preparing for looming tax hikes

With President Moon Jae-in promising to create 810,000 jobs and enhance welfare for ordinary people, the new government needs a big boost in fiscal income to execute jobs and welfare programs.

The Finance Ministry is preparing for a possible change in its tax code plan, which is expected to be completed by the end of July, according to ministry officials. After announcing the tax code plan, the ministry has to submit the plan along with the 2018 budget proposal to the National Assembly by Sept. 1.
(Yonhap)
(Yonhap)

“During the presidential campaign, our division was monitoring (then-candidate Moon Jae-in’s) pledges, of course. But I cannot comment further at this stage on anything. But we do have a deadline to submit the plan to the Assembly,” an official at the Finance Ministry’s tax policy division said.

However, the official refused to comment in detail on how the ministry is reviewing the changes, citing the sensitivity of the issue.

During his presidential campaign, Moon vowed to raise a total of 178 trillion won ($158 billion) in fiscal income in five years from 2018 to 2022 through three methods.

One of the ways is to collect 31 trillion won by revising the tax code and another is to raise some 30 trillion won by strictly taxing those who have avoided taxes and increasing non-tax income by 5 trillion won. The remaining 112 trillion won would be generated through cutting expenses at state-run firms and rooting out dubious budgets or pork barrel spending, according to a booklet of his pledges.

In raising 31 trillion won through a tax code revision, Moon said his first target would be high-income earners. While the government currently imposes the highest income tax rate of 40 percent on those who earn more than 500 million won in annual taxable income, the new government might raise it further, possibly to 42 percent, for those with more than 300 million won of annual income, according to the ruling Democratic Party of Korea’s plan.

If the government needs more tax income, then it will have to reduce tax benefits currently available to major conglomerates for various investments such as research and technology development, according to Moon’s pledges.

If the government is still short of tax revenue, then Moon vowed to seek agreement from the public to raise the corporate tax rate to 25 percent for companies earning more than 50 billion won of taxable income per year, as a last resort, according to what he said during presidential TV debates.

If the government revises the tax code this year, it would require parliamentary approval and it be applied to the next fiscal year of 2018. The ruling party has 120 out of the total 300 seats at the National Assembly. The main opposition Liberty Korea Party, which has 107 seats, is opposed to any tax hike. A tax rate revision requires a majority vote in the parliament.

Kim Jae-jin, a senior research fellow at the Korea Institute of Public Finance, said the government should take acceptable steps in seeking an increase in fiscal income.

“Ordinary people tend to have a tax resistant sentiment, in general. So, the government must carry out fiscal reform first, showing that it is doing everything it can. After that, it can collect more tax from tax evaders and high income earners,” said Kim, who added that raising 112 trillion won in five years through fiscal reform is an attainable goal.

“But it will be quite difficult to persuade people to pay more tax at a later stage. How the government will reach a public consensus will be very important.” 

By Kim Yoon-mi (yoonmi@heraldcorp.com)
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