[VIEWPOINT]Increased taxes not the answer

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[VIEWPOINT]Increased taxes not the answer

Has the president raised the issue of taxes? In his New Year’s address, President Roh Moo-hyun said that he would provide a fundamental solution to the problem of polarization, because there was an absolute lack of financial resources. He added that it was no use just to enhance the efficiency of finances and change the structure of expenditure. In the end, this leaves no other solution than collecting more taxes.
However, I sincerely hope he won’t use taxes to solve the polarization problem. Trying to solve polarization with tax money is even more irresponsible than his former public promise of 7 percent economic growth that he pledged to accomplish without thinking deeply about it. There is nothing we can do if the economy fails to reach 7 percent growth. However, if we utilize taxes for economic growth but it doesn’t work, the poor are the people who are going to suffer.
Let’s look at the reasons why tax increases will not work. First, a tax increase leads to a decrease in efficiency. There is an economic theory called “dead weight loss.” If taxes are raised, the consumers then consume less, laborers work less, and manufacturers react by manufacturing less.
Due to this change in the economic leaders’ actions, even if the additional taxes collected are returned later to the people by increasing financial expenditure, we will not be able to restore the standard of social welfare to the level of that before the tax raise.
The part that disappears due to tax raises is what we call dead weight loss. There are studies that show that Korea has a bigger dead weight loss than most advanced countries.
The second reason is equity. Who would oppose the idea of collecting more tax from the rich to relieve the polarization problem? Yet what would the rich do if the government tried to collect more tax from them? They would move their sources of income to places that don’t levy high taxes or that collect less, and in the end the government would not be able to collect the amount they anticipated.
The government would then raise consumer taxes or issue national bonds to make up for what they had implemented to relieve polarization. It is already a well-known fact that the lower income class loses more from both consumer taxes and national bonds. In addition, salaried workers, often called the see-through wallets, will obviously suffer more.
In the past, President Roh said that it would be okay for Korea to raise taxes because our tax rates are low compared to advanced countries. However, we shouldn’t accept this comparison at face-value. We must keep in mind that our society is not really an aging society yet and we have to consider that the weight of quasi-taxes, like social contributions, is still a big burden to our economy. Even if we consider these two factors, it is difficult for us to say that our tax burden is less than other member countries of the Organization for Economic Cooperation and Development.
Now, let’s even presuppose that we can safely collect more tax without raising problems related to economic efficiency and social equity. There still remains one fundamental problem. Is there a guarantee that polarization will be relieved if we carry out the various projects the president suggested, such as creating more jobs with tax money and expanding the social safety net? These projects have been promoted continuously since the present government came into power. But will they really alleviate social polarization all of a sudden, if only we put more money into them?
What is important right now is to carefully consider and find out the causes that have deepened polarization in our society. The polarization phenomena of diminishing jobs and weakening competitiveness of small to medium-sized companies all occurred in the market. Therefore, inducing companies to invest more in the market and hire more workers is the most urgent task at this point. In order to do this, the government must give assurances to the public that it is concentrating all its efforts on the economy, by such means as restoring consistency and confidence in its policies, and easing regulations. In short, economic growth is the surest solution to polarization in our economic situation.
President Roh said that he would not cling to achievements during his time in office. However, I hope that he gets more attached to achievements from now on, and can be evaluated as the president who solved the polarization problem with market principles, not with increased taxes.
In a capitalist country that neither belongs to the left nor the right and neither to progressive nor conservative, leaving the polarization problem to the market first of all is the best solution.
Only then will the economy revive, will more jobs be created and will business corporations that have moved out of the country come back.

* The writer is a professor of economics at Sungkyunkwan University. Translation by the JoongAng Daily staff.

by Ahn Jong-bum
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