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[Viewpoint] Tax reform dilemma: to delay or cut

Published: 02 Aug. 2009, 21:36

If financial policy is like brain surgery, the national tax system is like orthopedics. And just as arms and legs cannot be easily removed or attached, so the overhaul of the tax system requires careful consideration.

Because the tax system has a huge influence on people’s lives, the slightest change could lead to sweeping panic or confusion. For this reason, economy-related ministers tend to exercise restraint in talking about tax issues. However, the government has been placed in difficult circumstances because of these delicate issues.

The government has decided first to apply the brakes on tax reforms expected to give no direct benefits to the public. For example, a measure that would integrate the comprehensive real estate tax and the property tax has been set back and called a “long-term task.”

Although corporate taxes and income taxes are set to be lowered in a gradual manner and related acts and subordinate statutes have already been amended, some people in the political community insist that the amount they will be lowered by over the next year should not be determined yet.

Another major trend in tax reform is the reduction in benefits to large conglomerates and high-income people. The temporary tax credit system for investment, designed mainly for big business, will be stripped to the bare essentials or repealed, while income deductions for the salaried class are expected to be cut back as well, starting with the biggest loopholes and exemptions. For example, deductions for restorative medicine or plastic surgery are highly likely to disappear.

Income tax deductions for credit card payments have also been at the heart of the debate. At present, if credit card payments exceed 20 percent of one’s annual salary, that entitles the taxpayer to a 20-percent deduction up to a limit of 5 million won ($4,100). The basic logic behind this argument is pretty simple: since high-income earners enjoy large tax deductions because they pay the full balance on their credit cards, the government will decide to minimize such benefits.

As shown above, the government is caught in a dilemma between putting the brakes on attempts to cut taxes and going ahead with the plans.

Both implementation and suspension have advantages and disadvantages. If taxes are lowered as scheduled, the government may gain global trust while maintaining consistency in its policies. Meanwhile, if the plan is suspended, tax revenues may expand by several trillion won.

Minister of Strategy and Finance Yoon Jeung-hyun said, “There is some reason in both decisions. I will keep thinking about this matter.”

He makes it sound as though all possibilities are still available, and that we are living in a theoretical world of policy debates.

It is true that no policy is eternal, and economic policy should change with changing circumstances. On top of that, as we are being confronted with an unprecedented economic crisis, tax reform may be undertaken in a flexible manner.

However, the consistency of policies is also of great importance. Devising a predictable policy is an integral part of attracting more foreign investors, and the motivation for individuals and enterprises to work hard is based on trust in their government. In this context, the key decision for tax reform this year is whether to implement the plan of further lowering corporate and income taxes.

If the government delays cutting the highest tax bracket, tax revenues are estimated to total 3.7 trillion won next year. If the government proves willing to continue tax reductions, on the other hand, it will have to collect more taxes using other methods.

The question to ask the National Assembly is, “Do you really intend to delay lowering the income and corporate taxes?”

To lower these two taxes is a public pledge the government has already made at home and abroad. And this is an urgent matter, as Korea’s corporate and income taxes are higher than those of its export competitors, such as Taiwan, Singapore and Hong Kong. A higher tax may prompt companies to go abroad.

Tax reduction is a global trend. That’s why it is right to drive forward with the cuts as planned. Tax reduction is the trademark of the incumbent government. Now is a critical moment to boost the economy through tax reduction. Expanding investment and raising corporate competitiveness will guarantee more job opportunities, thus improving quality of life.

In addition, experts say that the Korean economy has hit bottom and is recovering at the fastest pace among Organization for Economic Cooperation and Development countries. If private investment and consumption is revived, the government will no longer need to spend stimulus money. Increasing tax revenues will relieve the government of financial worries. Tax reductions will offer incentives to people and will increase the scope of investment and income.

This is definitely a business-friendly policy.

*The writer is the senior economic news editor of the JoongAng Ilbo.

by Park Eui-joon