There are better ways to do it

The incoming Park Geun-hye government is seeking ways to raise funds for new social welfare programs. Instead of a tax hike, it plans to target underground economic activities and fix tax gaps with a removal or scale-down in tax incentives and exemptions. The comparatively large underground and unreported sector provides a mandate for the plan. But before any action is taken, the risks and repercussions on the lives of the less well-off and smaller economic players should be studied.

Endeavors to enforce transparency and activities to patch up the tax gap could have a strong impact on small-size enterprises and self-employed businesses. The tax evasion rate among self-employed businesses ranges from 29 percent to 57 percent. Penalties could stoke resistance as well as slow already sluggish domestic demand.

The backlash could cost the ruling party and government that vowed during the presidential campaign to place a top priority on fostering small merchants and boosting welfare for the lower class. Authorities should thoroughly and extensively study the repercussions before exercising levies and regulatory actions.

One of the ideas to enhance tax collection is to have the Financial Intelligence Unit of the Financial Supervisory Commission share information on financial transactions with the National Tax Service as part of efforts to account for unreported activities. But the unit has already been reporting large financial trade suspected of tax evasion to the tax authorities. About 32 people from various agencies, including seven from the NTS, are dispatched to the intelligence unit to monitor illegal financial activities every day. It is naive to think more people keeping tabs on financial transactions can suddenly shed more light on underground activities.

I agree with the need for action to transform the black market into a formal and legitimate economy. But in order to make the move more fair and ease the burden on small enterprises and self-employed businesses, authorities first should enhance tax transparency on large corporations and let the practice trickle down to self-employed businesses and individuals that work with them. Authorities could enhance independent auditing on large companies to increase tax revenue.

Authorities could offer incentives in taxation and financial transactions to companies that voluntarily and dutifully comply with outside audits, which could cut down on resistance to direct tax probes and at the same time boost transparency in tax collection.

When accounting becomes transparent with large companies through regular auditing, so would financial transactions with smaller companies and contractors they trade with. It the end, all business transactions could come under official purview.

To prevent leakage of income, authorities should extend authorization and usage of receipts and mobile payment settlements among teenagers and university students that primarily pay in cash.

Having succeeded in raising revenue from the private education sector by offering annual tax deductions on tuition fees for children, authorities could also offer tax deductions to payments on cosmetic surgery, legal counseling and tax services. Rewards should be raised for reports on tax cheats to encourage awareness of tax obligations.

Authorities collected 481.2 billion won ($443.4 million) in taxes through reports of 9,206 cases in 2011, but rewarded just 2.7 billion won for 150 cases. The underground economy cannot surface overnight. It must be warmed from above to let the light generally and extensively seep in.

Translation by the Korea JoongAng Daily staff

*The author is a professor of the business department at the University of Incheon.

by Hong Ki-yong