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[Editorial] Tax populism

Korea’s ballooning public spending cannot be sustained by increasing taxes on the rich, big firms

A senior lawmaker of the ruling Democratic Party of Korea said during a parliamentary session last month that the issue of tax hikes should now be put to public debate. Following the suggestion, other party legislators have put forward numerous ideas on how to increase taxes.

It was only a matter of time for the sensitive issue to come to the fore, given President Moon Jae-in’s administration has indulged in excessive fiscal expenditure since it assumed office in 2017 to offset the negative effects of its ill-conceived policies and to finance expanded welfare programs. A string of emergency relief packages implemented over the past year to cushion the economic shock of the pandemic crisis has added to increasing budget deficits.

The country’s fiscal soundness is set to deteriorate further, as government spending is projected to grow at a steeper pace in the coming years, while tax revenues continue to decline.

South Korea’s national debt, which remained at 660 trillion won ($586 billion) in 2017, is forecast to rise to nearly 1,000 trillion won by the end of this year. The figure is projected to soar to 1,327 trillion won in 2024, according to a five-year fiscal management plan announced by the government last year. The ratio of the country’s national debt to its gross domestic product is estimated to reach 58.3 percent that year, up from 40.1 percent in 2017.

Korea saw tax revenues fall by nearly 8 trillion won last year, marking a second consecutive on-year decrease for the first time.

The Moon administration and the ruling party need to step up efforts to reduce wasteful and overlapping fiscal spending before moving to raise taxes.

If tax increases are inevitable in the long term to strengthen the social safety net and help reinvigorate the economy, the focus should be put on expanding the tax base in accordance to the principle of universal taxation. The country’s taxation scheme is far from balanced, given its excessively disproportionate reliance on large corporations and affluent individuals for collecting revenues.

According to data compiled by an opposition lawmaker’s office last year, the top 1 percent of companies in terms of turnover paid 78.4 percent of all corporate taxes in 2018, up from 75 percent four years earlier. Over the cited period, their proportion of corporate earnings was down from 51.6 percent to 50.2 percent.

The highest 1 percent of individual income earners shouldered 41.6 percent of income tax in 2018, while earning 11.2 percent of total income. The corresponding figures for the top 10 percent bracket stood at 78.3 percent and 36.8 percent, respectively, in the same year.

In the case of wage earners, the top 1 percent and 10 percent groups each paid 32 percent and 73.7 percent of total taxes collected form salaried workers in 2019, while their shares of aggregate salaries remained at 7 percent and 31.6 percent.

By contrast, nearly 4 in 10 wage earners paid no taxes in the cited year. The proportion of workers who are tax exempt in Korea is higher than the corresponding figures for most member states of the Organization for Economic Cooperation and Development.

The country’s taxation system has been further distorted by measures taken by the Moon administration to impose heavier levies on the rich and large firms and to extend or expand tax benefits for the rest.

Tax increase ideas floated by ruling party lawmakers would only result in exacerbating the unbalanced scheme by increasing the burdens on the rich and large companies. For instance, a party legislator proposes collecting an additional 3 trillion won to 5 trillion won in annual taxes from high-income earners and the 100 largest corporations.

The ruling party may well be criticized for attempting to win over lower-income voters by making further populist changes to the already distorted structure of taxation.

It is a fundamental principle that every citizen earning incomes and benefiting from public services should pay some amount in taxes. It goes against this principle to further raise highly progressive rates imposed on high-income earners and big profitable companies while leaving a large portion of workers and businesses exempt from tax payment.

Calls for a higher tax burden on the affluent could sound more persuasive when the taxation system is overhauled to ensure all people earning incomes pay their due share of levies.