Mindset taxes government
The number of people like Park is increasing, along with concerns about the effect on Korea’s economy.
“In times of economic difficulty, many people hold on to property instead of giving it to their children,” says Hwang Jae-kyu, a tax accountant at Shinhan Bank.
Not only are Koreans holding on to their assets, they are spending less, which means less tax revenue for the government.
A 38-year-old homemaker surnamed Kwon hardly uses her credit card when she goes grocery shopping. To cut down on expenses, she started buying at traditional markets instead of large chain supermarkets because she usually receives discounts for paying in cash.
“I feel the store owner is trying to avoid paying taxes, but still, I pay in cash because that way I can save a lot,” Kwon said. “Even if I use credit cards, I try to cut down on unnecessary purchases and buy items at stores that give discounts and coupons.”
It doesn’t mean, however, that the Kwon family’s income has dropped this year. Rather, the family is cutting down on spending because they are “concerned.”
With more families like Kwon’s tightening their belts, credit card spending last month grew at its lowest rate since January 2012.
According to the Credit Finance Association, in May, a total of 38.6 trillion won was spent using credit cards, which is up 2.4 percent compared to the previous year.
The volume of online trading fell 33.7 percent last month compared to the previous year while credit card spending at department stores also dropped 6.1 percent. Meanwhile, spending at large supermarkets, grocery stores and convenience stores increased, signaling that Koreans have closed their wallets on unnecessary items.
According to the National Tax Service (NTS), a total of 70.5 trillion won was collected this year through April, which is 8.7 trillion won less than the amount collected over the same period last year. The NTS aims to collect 199 trillion won in taxes this year, but so far it has only collected 35.4 percent of that, 5.8 percentage points lower than the collection rate during the same period last year.
In a rare move, the NTS said during a policy briefing for National Assembly lawmakers, “it will be extremely difficult for us to secure the tax [forecast] this year.”
The decline in tax collection reflects the flow of the domestic economy. Company profit has plunged and household consumption is lacking. There also are fewer transfers of properties.
The amount of corporate tax paid by companies has also dropped. From January to April this year, the NTS collected 16.5 trillion won in corporate tax, or 36 percent of its goal down from 44.2 percent of the 2012 goal collected at the same time last year.
Corporate tax dropped because companies are making less profit due to difficult business conditions at home and abroad, and experts say the situation will only worsen.
According to Korea Exchange and the Korea Listed Companies Association, first quarter sales of the 625 listed companies reached 286.4 trillion won, down 1.4 percent year-on-year. Their net profit plunged 9.7 percent to 14.4 trillion won.
And just like individuals, companies are spending less out of concern that economic conditions will further deteriorate.
Changes also are seen in the amount of inheritance and gift taxes collected.
According to industry sources, those with 2 billion won or less in assets are reluctant to pass on their wealth to families, whereas wealthier people have turned more aggressive.
For example, a 55-year-old surnamed Kim, who is vice president at a large company in Korea, recently passed on one of his two apartments in Bundang, Gyeonggi, to his son. The value of the 100-square-meter apartment in Bundang had once reached 900 million won, but at present it is 600 million won.
“I decided to give the apartment to my son when the price is down, thinking that I would pay less gift tax,” said Kim.
If Kim gave his apartment to his son when it was worth 900 million won, he would have paid 200 million won in gift tax. But with the fallen value, he paid half that.
By Kim Chang-kyu, Sohn Hae-yong [firstname.lastname@example.org]