Taxes and our growing deficit

The government is poised to levy a separate consumption tax on large air conditioners and refrigerators. At the same time, it is reviewing the possibility of raising the tax rate on liquor and cigarettes. The government said it is looking to lower energy use and lay down the foundation for environmentally friendly green growth. But the real intention may be to compensate for the snowballing fiscal deficit.

On Monday, participants at a forum on finance management said that it will be difficult for the country to avoid huge deficits both this year and next.

The world is currently fighting two wars. With one hand it’s battling a widespread economic crisis, while with the other it’s struggling to contain mounting debt. The two are related, as countries are trying to spend their way out of the economic slump. If federal deficits grow by too much, interest rates will rise, prolonging an economic recovery. Britain and some eastern European nations have been unable to issue bonds because of high deficits, and several have been pushed to the brink of national insolvency.

The United States has already decided to raise taxes on those at the higher end of the income scale. Britain and Germany are following suit, and Japan is prepared to raise its consumption tax rate (Korea’s equivalent is the valued-added tax) by 1 percentage point each year.

As soon as we’re out of this economic morass, we will have to tackle our deficit problem head-on. And it can’t be done with stopgap measures such as imposing a consumption tax or abolishing tariffs. These measures are ineffective, and they only further complicate the tax system.

The government should look at the bigger picture by refocusing on the taxation reform it has promoted.

First, it should reduce the number of goods and services that qualify for tax exemptions or tax cuts. That would conform with the basic principle of the tax reform goals.

Also, the government shouldn’t simply raise indirect taxes - which are relatively easier to collect - while leaving direct taxes untouched. Indirect tax already accounts for more than half of all Korean tax. The government should expand the general tax rather than implement new special-purpose taxes.

A problem as difficult as the fiscal deficit should be solved with an established set of rules, not some quick moves that simply slap a Band-Aid over the problem. A responsible, thorough tax policy will minimize damage and win over the public.