Fairness and transparency

The last time the underground economy came under such scrutiny was when President Kim Young-sam implemented a law to enforce all financial transactions in real names in 1993 to eliminate corruption and irregularities in the economy. Today’s controversy over the crackdown on the black market is equally hot.

The Constitution is a political manifesto of the people. Article 38 of the Constitution clearly stipulates that all citizens according to the law have the duty to pay taxes. It is why we mostly comply with obligations under the principle of justice and fairness. But individually, there are many reasons for complaints and resistance.

The state provides various public services based on tax revenue. The services are offered according to law-stipulated guidelines without any conditions. Those who have not paid their taxes get a free ride of public social benefits, while those who have dutifully honored their tax obligations may not get as much as they paid. This is not entirely fair or just.

Some oppose exposing and cracking down on the black market because collecting taxes through such means won’t significantly help finance the new government’s welfare plans.

Regardless of the motivation, President-elect Park Geun-hye’s idea of tracking down tax cheats and noncompliance could be meaningful to enforce fairness and transparency. The role of the state is becoming more and more important due to structural social problems such as polarization, low birth rate and rapid aging that demand costly public finances. But raising taxes is not an easy option, since dutiful taxpayers become more exposed and pressured as they provide expedient tax resources to the authorities. It could tempt them to hide their income. Authorities therefore should seek other ways to increase tax revenue.

But their endeavors must not be sudden and intimidating. They must protect the weaker parties like self-employed businesses, merchants and low-income irregular workers who resort to off-the-books activities out of desperation and necessity. Instead of a crackdown, authorities can present incentives and a grace period to cajole the black market to come up from the underground. The Korea Financial Intelligence Unit and National Tax Service must be discreet in sharing private data so that abuse of power and privacy violations do not occur. The higher authority should have a control mechanism in setting the guidelines, an outside auditor, and penalties to prevent abuses and leakage of personal tax data.

Some also argue that efforts to expose the black market would only add work and be redundant. They argue there are already enough regulations in place to penalize tax evasion and undocumented activities. Authorities should re-examine whether current tax code and regulations are well executed and come up with a better framework to enhance transparency and effectiveness in collecting taxes.

South Korea is estimated to have the fifth-largest unreported black market compared to the gross domestic product among the Organization of Economic Cooperation and Development. We often cite the U.S. and Europe with envy for all the public service and social benefit the governments offer to their citizens. But we do not comment on their strict rules and penalties for tax noncompliance.

We need to shed light on the shadow economy so that people can better enjoy their rights and benefits according to their tax commitment. But the steps must be incremental as not to scare and upset the market. Hastiness and overzealousness could do more harm. Enforcing justice and fairness in taxation should be pursued as a continued policy.

Translation by the Korea JoongAng Daily staff

*The author is a professor at Hankuk University of Foreign Studies Law School.

by Choi Seung-pil