Negotiating a taxing transition

The government has unveiled plans to revise the tax code, its last attempt to retouch the system before it ends its five-year term. Unlike in previous years, it kept the framework more or less intact as it would be too burdensome for the outgoing government to make sharp changes to the tax code.

The revised version will be submitted to the National Assembly in September, inviting the newly launched legislature to work on the changes that would be applied when the incoming government takes over. Minister of Finance Bahk Jae-wan said the government was open to “big changes when necessary” in its set of proposals.

The government hopes to revise the tax code to boost domestic consumption, encourage hiring and improve public finance. Broader tax benefits for the working-class and extended tax incentives for research and development are commendable, as was the policy of trying to increase tax revenue by providing incentives instead of merely resorting to tax hikes.

In response to calls from the political circle and a new public infatuation with economic equality, the government proposed levying more taxes on large companies and high-income earners. It raised the minimum tax demanded of large companies to 15 percent from 14 percent, and lowered the target for annual income tax to 30 million won ($26,650) from 40 million won. It came up with the idea to increase revenue without raising the corporate and income tax base. The Finance Ministry estimates the move will yield an extra 1.66 trillion won in tax revenue from next year.

But in reality, tax revisions do not translate immediately into revenue. The ministry’s rough estimate is based on what it expects to happen five years after the new system is implemented. What bolsters tax revenue is economic growth, as taxes are collected based on corporate and individual incomes over the past year. If the economy grows less than 3 percent this year, next year’s tax revenue will fall short of expectations.

The reduced tax revenue, coupled with ambitious welfare vows by presidential candidates, could hurt public finances. Therefore, the legislature, while reviewing the tax code proposal, could instead end up hiking various taxes. The opposition and ruling parties are demanding higher taxes on the rich, but as this could dampen consumer spending and important economic activity, much care is needed.