Taxes likely to rise after election

Tax hikes now appear inevitable in the wake of the Dec. 19 presidential election as all three candidates agree on the need to boost this source of revenues, but differ on the methods.

While Park Geun-hye from the ruling Saenuri Party argues that tax revenues can be raised by cutting unnecessary spending and reducing exemptions, Moon Jae-in from the opposition Democratic United Party (DUP) believes in raising corporate taxes and drawing more blood from the rich. Independent Ahn Cheol-soo calls for universal taxation rates.

Moon has sent the clearest message about taxation among the three. He said the threshold for the highest income bracket should be lowered from 300 million won ($271,850) to 150 million won. Currently, those who earn over 300 million won a year pay 38 percent of their annual income as tax. Moon intends to make more high income earners pay up at the top rate.

The DUP frontrunner also asserts that the corporate tax should be hiked from 22 to 25 percent.

However many experts are concerned about his tax pledges given the political controversy surrounding moves to tax the rich.

“After the global financial crisis in 2008, some countries raised their income taxes or value-added taxes in order to secure fiscal soundness, but no single country has increased its corporate tax rate,” said Ahn Jong-seok, a senior researcher at the Korea Institute of Public Finance.

Park’s presidential camp is considering revamping the value-added tax law. Kim Jong-in, who heads a committee at the camp, said Tuesday this was needed as the law has not been revised for 35 years. His remarks sparked a debate as to whether Park intends to raise the rate above its current 10 percent.

Value-added tax is the easiest to adjust because it is so low in Korea. Denmark and Sweden both keep it at 25 percent, Britain has it at 20 percent, France charges 19.5 percent and Germany 19 percent.

The Korean government has refrained from jumping in on the debate due to its political sensitivity in an election year and the fact that it would hit low-income households the hardest.

“Since we’ve never changed the [universal] rate, we’re treading very carefully because doing so would lead to a lot of complaints from the working class,” said an official at the Ministry of Strategy and Finance. “Due to inflationary pressure, lifting the rate may also cause consumption to contract further.”

Na Seong-lin, a policy maker at Park’s camp, said the party is considering lowering the threshold for the highest rate of income tax to 200 million won.

Ahn has not officially mapped out his tax policy in public, but his faith in universal taxation is well known from his latest book, “Ahn Cheol-soo’s Thoughts.”

Ahn believes everyone should pay on a graded scale according to their salary, with the rich paying more and the poor also contributing. His stance on corporate tax is that conglomerates should get fewer breaks.

Most pundits view tax hikes as inevitable. According to the tax research institute, Korea’s national debt-to-GDP ratio would shoot up to 128 percent by 2050 if the current welfare services are maintained. In order to keep the debt rate at 40 percent by that deadline, the average tax burden ratio should be raised to 24.8 percent from the current 19.7 percent, they say.

“To prevent the national debt rate from surging, we need to start talking about paying more taxes,” said Lee Young, an economics professor at Hanyang University. “First, let’s think about cutting tax exemptions and reductions, and then let’s talk about adjusting income tax rates. Corporate and value-added taxes should be last on the list.”

“In order to share the burden with future generations, more taxation is needed,” chimed in Kim Seong-tae, a professor at Cheongju University. “But the public must decide. If they want more welfare services, pay more taxes. Otherwise, pay less, and get less.”

By Seo Kyung-ho, Kim Young-hoon [ssh@joongang.co.kr]