Curbing intelligent tax evasion

With Korea’s economy having become more globalized and its information technology more advanced, there is a new wave of cutting-edge tax evasion schemes. Our banking industry is churning out diverse financial instruments - gold banking and yen swapping, to name a few - to effectively avoid taxes, not to mention the continuous expansion of Internet trading, including social commerce.

Lately, several “power bloggers” were arrested for receiving huge monetary bribes from manufacturing companies in return for promoting their products in cyberspace, and a software game company was accused of having dodged as much as 5.6 billion won ($5 million) in taxes after selling a whopping 18 billion won worth of products per year. A private lender was even caught grabbing 42 percent interest from domestic venture businesses without paying any tax after setting up a phantom company in an overseas tax haven in order to pose as a foreign fund investing in domestic venture companies. The National Tax Service is investigating renowned plastic surgeons and lawyers who allegedly asked their clients to pay fees to their nurses and staff.

Dr. Friedrich Schneider, an Austrian expert on the shadow economy, estimates that Korea’s underground economy takes up 27.6 percent of the GDP - two times higher than in developed countries, and almost on par with countries like Portugal (28.1 percent), Greece (26.3 percent) and Italy (23.2 percent). Only when the portion of the shadow economy decreases can we expect an increase in tax revenue and a recovery of fiscal health. Highly intelligent tax evasion schemes foster social disharmony and have a direct impact on our social safety network - including the national pension and health insurance systems - which has an income-redistribution function. Therefore, the first step toward the goal of “broader tax sources and lower tax rates” begins with efforts to prevent tax evasion.

The general and presidential elections scheduled for this year will certainly see a rise in the demand for welfare. Though the ruling and opposition parties have been silent on how to fund the demand, the government will inevitably raise taxes to secure 100 trillion won for increased welfare programs. To reduce citizens’ resistance to tax increases and persuade them to contribute more, the government must first root out tax evasion. Higher tax rates only augment the temptation to evade taxes. The NTS must come up with ideas to eliminate any loopholes in our tax code. Punishing those who lent their names to tax evasion could also be a solution.