A blacker black marketSome think of the controversy over information sharing between the Financial Services Commission’s Financial Intelligence Unit and the National Tax Service as wrangling between government agencies over jurisdiction. But that criticism derives from ignorance about the work the two agencies do and the conundrums they face. The essence of the debate is how much access the tax authority should get to confidential banking and financial data without prior consent from the individuals.
Considering the repercussions on private citizens and economic activities in general, whether the NTS should get direct access to the FIU files needs to be decided after a thorough study of the advantages and risks. But as it stands currently, it looks like the extra availability of information will do more harm than good.
First of all, it isn’t clear how much new revenue the tax authority can dig up by mining the underground economy and going after unreported income. The NTS believes it can add as much as 4.5 trillion won ($4.05 billion) to government coffers. But that estimate is based on the naive expectation that the underground economy will be easy to track down. Just as there are limits to how low you can get the unemployment rate, there are limits to how much of the underground economy you can unearth. Not all cash-based economic activities are illegitimate or unreported. There is no economy in the world that doesn’t have a black market.
Second, the NTS already has enough access to the Financial Intelligence Unit. The FIU employees on the inspection and review team are mostly dispatched from the NTS. They compile data from suspicious money trails, and once they come up with a shortlist of suspected tax evaders, they hand over the information to the NTS. Of all the government agencies, including the prosecution, the NTS has been the FIU’s biggest client in recent years. A full 48 percent of the information from the FIU has gone to the NTS since 2002. And assistance to the NTS has been increasing - over the last three years, that number rose to 56.6 percent.
Active financial intelligence sharing with the NTS could trigger unexpected side effects. It could in fact push the black market deeper into the shadows and make it bigger.
The radical move of making it obligatory to conduct all financial transactions using your real name helped reduce the size of the shadow economy. In return, financial authorities and institutions promised confidentiality. According to the Institute of Public Finance, when the real-name financial transaction policy was implemented in 1993, the underground economy shrank around 5 percent. Full NTS access to the FIU files would break the guarantee of financial secrecy. And that could breed informal and surreptitious economic activities.
The loss of banking secrecy could take a toll on our society and our economy. Nobel Laureate economist Gary Becker said the level of tax evasion depends on the level of punishment by the law. Even ordinary people would be tempted not to pay their taxes if the cost of punishment were smaller than the gains from noncompliance. A more effective way to defeat the black market would be stronger penalties on noncompliance.
If the FIU primarily serves the tax authority, its mandate of fighting crime and guaranteeing freedom in financial transactions would be shaken. It is wrong to disclose the FIU data just because some transactions can be linked to tax cheats. The FIU serves to combat not only money laundering, but also identifies terrorist financial channels, activities that require strict intelligence confidentiality. The two agencies can assist one another in targeting the underground economy, but they must find a way that won’t cause their common goal to infringe on their primary roles.
By Kim Ja-bong
The author is a researcher at the Korea Institute of Finance.
Translation by the Korea JoongAng Daily staff.