The secret to welfare is in the VAT

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The secret to welfare is in the VAT

The United Kingdom is considered to have a relatively low welfare level compared to other Northern and Western European nations. Unlike German and French universities, all British colleges require tuition payments from students, as much as £9,000 ($13,577) per year. While public elementary and secondary schools offer free education, a high percentage of parents choose expensive private options, which charge about twice the university tuition. Eighteen percent of high school students are enrolled in such schools. Also, unemployment benefits aren’t very high - at £56 to £71 a week. Instead, the government offers medical insurance and comprehensive protection to those members of society who need it, such as the handicapped and refugees.

The tax rate in the U.K. is 28.4 percent, about 9 percent higher than it is in Korea. The VAT is 20 percent, twice Korea’s rate. The highest income tax rate - 50 percent - is levied on those with annual earnings of more than £150,000.

Still, the British government is struggling to provide welfare benefits. Lately, the government has been considering or has decided on a reduction in childcare subsidy recipients, selective senior heating subsidies, an integration of the senior pension and national pension and an exclusion of short-term foreign visitors from public medical service.

More tax revenue is needed to maintain the welfare benefits, but it’s not easy. The British government has lowered the corporate and income tax rates in order to prevent companies and individuals from relocating to other countries in the European Union with relatively lower tax rates, such as Ireland or Luxemburg. Recently, France attempted to drastically increase its tax rate for high-income earners, and many wealthy citizens moved to Belgium. So the only remaining option for the government is to increase the VAT. The U.K. increased it by 2.5 percent in 2011 and Finland upped its rate from 23 percent to 24 percent early this year.

When I met with Korean economic and financial ministry officials, I offered my opinion on the necessity of raising our VAT. A high-ranking official who has been appointed to a ministerial position said during his business trip last year, “A 2 percent hike in VAT would relieve the welfare concerns.” But many other career bureaucrats remain silent, probably because they don’t want to go against the president, who has opposed tax increases.

Some pundits say raising the VAT could lead to the collapse of the administration. But the move was handled without much trouble in the United Kingdom two years ago. Spending shrank initially but recovered after a few months. The government’s efforts to persuade the public worked because it was in its early days, when Prime Minister David Cameron’s approval rating was fairly high.

Welfare is war. The government needs a drastic strategy to get through the minefield of citizens’ tangled interests. A few days ago, I met Professor Chang Ha-joon of the University of Cambridge, and he said Koreans would accept a tax increase if the government provides a convincing explanation on how desperate the welfare expansion situation is.

*The writer is the London correspondent of the JoongAng Ilbo.

by Lee Sang-eon
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