[Viewpoint] Taxing the rich won’t save the rest

In their race to sell their welfare plans ahead of the April legislative elections, both the ruling and opposition parties have ambitious and expensive plans. Whether they work or not depends on funding. If politicians can come up with enough funding, they can go on spending, but if not, the promises will end with the election. Their promises to expand welfare benefits all come down to money and how it will be raised and distributed.

There are three ways to raise the money. One is to reduce other expenditures to increase welfare spending. For instance, after-school education funding could be moved to make school meals free or the arms modernization plan could be scaled down to raise monthly allowances for soldiers. New spending won’t disturb the overall budget but cannot do much to improve welfare.

Second is to raise the debt. Japan and European countries have done this to expand welfare. It is a relatively easy way to get the money, but having witnessed the fiscal mess European countries got themselves into from liberal fiscal spending on welfare benefits, the plan may be out of the question.

It also won’t win consensus because it means that the contemporaries are sticking the coming generation with the bill for their comfort.

Finally, there are taxes. The government and politicians won’t have to rack their brain on budget math and worry about debt increases. A tax increase is the best solution to finance welfare spending. These are basics most voters understand.

But raising taxes is not so simple. We must understand the tax mechanism first. Higher tax rates do not translate into more revenue. Tax is calculated based on the income-based taxpayer’s formula multiplied by the tax rate. If the standard value of taxation decreases, revenue won’t increase with higher rates. If standard value taxation increases, so does revenue, even with lower rates. It is hard to make up the balance.

The Democratic United Party wants to levy a wealth tax on the richest percentage of the population, including large companies, and increase tax revenue by 25 trillion won ($22 billion). This could help fund necessary welfare spending by 2017.

The majority 99 percent population and corporate community welcome the plan because they won’t be affected.

But the chairman of the Korea Federation of Small and Medium Business, which represents the smaller corporate community, opposed the idea, saying slapping discriminative taxes on rich and large companies could dampen consumption and corporate activities, which would end up slowing the economy and making lives worse for small businesses and common citizens.

The country’s top 1 percent companies pay 80 percent of total corporate taxes, the top 7 percent of self-employed entrepreneurs pay 85 percent of total income taxes and the highest 12 percent of income earners pay 85 percent of total payroll taxes. About 40 percent of income earners and self-employed businessmen do not pay taxes.

To demand higher taxes from the most dutiful taxpayers who have been paying for most of the tax revenue to spend on better welfare benefits for those who pay lower taxes would be cruel and unfair.

Raising maximum rates for corporate and income taxes could, in the long run, reduce tax revenue. With higher rates, companies and employees will be discouraged from working toward greater returns and income as these efforts would only mean more taxes.

In welfare-haven Sweden, wealthy companies and entertainers move overseas to escape excessive taxes.

If large companies reduce corporate activity at home and high-income earners move overseas, the tax base would not only be watered down, but supply and contract-based small industry will be killed and jobs lost, threatening household economies.

Tax revenue is more affected by economic growth than tax rates. Revenues increase or decrease depending on the growth of the economy. Strong growth would translate into larger tax revenue the following year.

A slowdown would slow or reduce tax revenue. Instead of slapping on more taxes, large companies and the wealthy should be encouraged to spend and help bolster the economy to increase tax revenue.

It may be pleasing to see the wealthy heavily taxed, but it won’t make the problem go away.

by Kim Jong-soo

* The author is an editorial writer of the JoongAng Ilbo.