A taxing issueThe government’s move to lower the income tax base by 2 percent to spur consumer and corporate spending has hit a snag amid complaints that it will provide yet another tax break for the rich. Opposition parties honed their rallying cry against a tax cut that works in favor of the wealthy, emboldened by encouragement from an unexpected corner.
Prime Minister Chung Un-chan, a former economist, recently said in a legislative appearance that he personally thinks “the government should reconsider its plan to reduce the income tax base.”
Politicians from the ruling and opposition parties are said to be tilting toward keeping the tax rate level unchanged for the top bracket - those whose earnings exceed 88 million won ($76,100) - in hopes that they can avoid a populist outcry.
Income taxes are levied in the range of 8 percent to 35 percent based on earnings.
Instead of using a political trick, politicians should take heed to a plausible solution offered by the Korea Development Institute.
The state-run think tank proposes a hike in the property tax in proportion to the cut in income tax. It suggests that this type of policy mix will aid tax efficacy and average household wealth in the longer run.
Some might jump at the mention of an adjustment in property tax due to the nightmarish experiment with the comprehensive real estate tax. But increases in the ad valorem tax are unavoidable.
Tax revenues from real estate mostly come from property transactions, and the share from tax levied on the owner according to the value of his or her property is unreasonably low when compared to advanced economies. Property tax, compared to other direct taxes, is relatively weak in affecting inflationary pressure and less burdensome on overall income.
An income tax cut had been a campaign pledge of President Lee Myung-bak and the Grand National Party. Reduced payroll tax can give consumers greater leeway in spending and help spur growth. This issue should not succumb to a political turf war. The government and the ruling party must stick to their initial 2 percent cut in income tax and also examine adjustments in property tax.
Companies may protest a hike in taxes on industrial sites at a time when their investments play a crucial role in speeding up the lethargic economy. But they should be compensated with the planned cut in corporate income tax.
The government and politicians should study the KDI proposal and try to seek a workable solution instead of wasting time bickering.