[OUTLOOK]Growth better than tax increases

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[OUTLOOK]Growth better than tax increases

We often encounter opinions that have different interpretations of the same facts. This can be simply a difference in viewpoint, but a difference in interpretation results in a difference in action, which in turn leads to very different consequences between the two opinions. Likewise, a difference in opinion that was like different dreams on the same bed was clearly revealed in President’s Roh Moo-hyun’s “dialogue with the people on the Internet” last week. In particular, a difference in interpretation appeared concerning tax issues.
With regard to the controversy over a possible tax hike that was created because of his New Year’s address this year, Mr. Roh emphasized that even if taxes are increased, the 20 percent high-income bracket will largely carry the burden for the general public. This argument was based on the fact that the upper 20 percent of income tax payers pay more than 90 percent of the total income tax.
But regarding this objective data, the president’s interpretation and that of many economists, including me, seems to be different. First of all, the upper 20 percent of income tax payers are about 2.5 million salaried workers, and they are different from the 20 percent of actual high income earners that consist of high income self-employed people and professional workers. When considering total income, including income from work, business and all kinds of assets, most of them belong to the middle class. Therefore, imposing more tax on them would mean, after all, passing the burden of tax increases to salaried workers in the middle class and above.
To reduce such a burden on the middle class, there is no other way than to broaden tax resources, and to do this, there are three primary methods. One method is to strengthen taxation on those who earn a high income but pay less tax. Another is to lower the too high proportion of those who are exempt from taxation. The last is to raise some taxes on consumption, like the increase in the tax on soju, or distilled liquor, that was proposed last fall. As to the first method, there will be no disagreement among most of the public. But the second and third methods cannot help but increase the general public’s burden in the end. In other words, if tax is increased on the upper 20 percent of income tax payers as the president suggested, the burden will be passed onto the middle class salaried workers, and if tax resources are expanded to avoid this, the burden will eventually be passed on to the general public.
The politically most welcome policy to increase tax will probably be to examine the income of the actual high income earners in our society by all means and put most of the burden of the tax increase on them. But this method too may bring about many adverse effects in the long term. As we can see from the cases of advanced countries, the pressure of any tax increase on high income earners makes them double their efforts to reduce taxes, and generally may discourage investment and spending in the private sector. If job creation becomes difficult because of slower investment and if the income of small-business owners drops because of slow spending, this eventually harms the general public. In other words, any policy to raise tax, whatever method it may be, will increase the burden on the general public in the long run and run the risk of holding back the recovery of domestic spending.
Rather than tax increases, it would be the most reasonable alternative at present to collect more tax based on the existing tax system by creating jobs and aiding the recovery of domestic spending through active growth policies.
Aside from the controversy over the policy to increase taxes, what was most regrettable in the discussion on the Internet last week was the president’s attempt to solve all issues, including real estate, taxation and education problems, by dividing people into those in the high income bracket and the general public. This attempt not only distorts the essence of the problems but also in many cases may end up bringing harm to the general public.
The focus of policy should now be put on the middle class, which constitutes more than 60 percent of our society. In addition, the policy should not be in the direction of pursuing growth through a government-led redistribution of income but by improving the distribution structure through growth that is centered on the private sector.

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

by Lee Doo-won
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