Public welfare a taxing issueThe Saenuri Party appears to be getting ready to increase tax revenues by various means including legalizing the underground economy and introducing a minimum tax for high-income earners.
This is seen as an attempt to quickly realize the pledges of President-elect Park Geun-hye and raise financial resources for broader welfare programs.
We are supportive of the ruling party’s plans to reform the tax system and increase revenues, but not simply because it will secure a larger tax base.
While the two plans will likely have a strong impact in terms of fostering a fairer economic system and normalizing tax rates, their effect on raising tax revenues is expected to be quite small.
Park and her associates say the country’s underground economy is worth about 372 trillion won ($346.4 billion), and that legalizing about 6 percent of this will bring about 1.6 trillion won of additional tax revenue annually.
They expect to raise another 1.4 trillion won a year by cracking down on tax evaders among the high-income-earning self-employed and companies.
By imposing a 30 million won ceiling on tax benefits for high-income earners, they also expect to collect up to an additional 300 billion won a year.
Altogether, the revisions will generate an extra 3 trillion won or so in annual tax revenues.
This is equivalent to about 1 percent of the annual state budget, and falls way short of the 131 trillion won in welfare expenses needed for the programs that Park has promised for the next five years.
Furthermore, many critics claim the Saenuri Party has exaggerated the size of the underground economy.
Taking such factors into account, the party’s plan is hardly likely to raise 3 trillion won a year, meaning that it needs to reconsider how it will generate the resources to subsidize all of these welfare programs.
For Park to follow through with all of her welfare pledges, tax hikes would appear to be inevitable. Without these, welfare expenditures would need to be lowered as budget deficits will be on the cards.
Either way, Park must reconsider her welfare pledges unless she expects taxpayers to happily accept losing more of their monthly income.
In governing, there is always a delicate balance between offering benefits to citizens and allowing them to keep earned money in their own pockets. It would be wise for Park and her new administration to determine where they stand.