Gov’t welfare policy hits brick wall over funding

The Park Geun-hye administration and the ruling Saenuri Party appear cornered as the public resists new taxes to pay for the expansion of promised welfare benefits.

Analysts told the JoongAng Ilbo the time has come for the government and politicians to come clean about the real price tag for wider welfare benefits and try to find a national consensus on how to pay the bill.

But neither the Blue House nor the ruling party have taken any steps in that direction.

During last year’s presidential election, Park promised wider welfare benefits without raising tax rates. To help pay for the pledges, the government announced last week a plan to cut tax credits for people who earn 34.5 million won ($30,984) or more a year.

That was going to raise an additional 48 trillion won yearly for the total of 135 trillion won needed to pay for the president’s welfare pledges.

After instantaneous backlash from the public, a delighted opposition and even the ruling party itself, the government backed down after only five days.

After urgent discussions, the government partly surrendered and presented a new version that will only increase the tax bill on people pulling in more than 55 million won a year.

That will reduce new revenue raised by 300 billion won.

The fundamental dilemma of paying for the expanded welfare programs remains unresolved. According to a National Tax Service report submitted to Representative Ahn Min-seok of the Democratic Party on Tuesday, revenue shortfall has emerged as a serious problem.

According to the report, the government collected nearly 92.19 trillion won from taxpayers from January to June this year, 9.3 percent lower than the 101.59 trillion won from the same period last year. Tax revenues for this year are, in fact, the lowest they’ve been in the last three years.

During last year’s presidential campaign, Park promised that she would spend an additional 27 trillion won annually - 135 trillion won for her five-year presidency - on welfare.

In 2012, the Lee Myung-bak government spent 93 trillion won on welfare. In 2007, welfare spending was 61 trillion won.

Park insisted that the revenues for the widened welfare payments would be found without a raise in taxes.

She said cutting unnecessary government spending would be the source of 60 percent of the money and cracking down on the untaxed underground economy would raise the rest.

When the Park government’s tax reform plan was announced Aug. 8, her aides insisted it was not technically a tax hike because the tax rate was not increased. They said the ending of certain tax credits would be almost painless to the public.

Cho Won-dong, senior presidential secretary for economic affairs, quoted the famous dictum by Jean-Baptiste Colbert, the 17th century finance minister to France’s King Louis XIV: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”

The public ended up hissing pretty loudly and the opposition gleefully whipped up their displeasure.

“Wider welfare without a tax hike is a kind of Maginot line,” said an economic official of the Blue House. “If we back down from it, we won’t be different from the Democratic Party.”

Deputy Prime Minister for Economic Affairs Hyun Oh-seok also ruled out the possibility of increasing the income tax rates or corporate tax rates.

Analysts say it’s now an impossible mission for the government to offer wider benefits without raising taxes.

“The government cannot create something out of nothing,” said Yun Kun-young, professor of economics at Yonsei University. “Pushing forward a welfare policy without tax revenues doesn’t make sense.”

Saenuri lawmakers also said a tax hike is unavoidable to follow through with Park’s pledges. “They wonder how the government can finance welfare programs without increasing the taxpayers’ burdens,” said Representative Yoo Il-ho, party spokesman.

Representative Cho Hae-jin also said the only way to get out of the welfare corner is to carefully increase the tax rate in a way that doesn’t infuriate the public.

While some in the Blue House admit that there are growing demands for the administration to accept realities, a top presidential official flatly turned down the possibility of either modifying the welfare pledges or increasing the tax rate.

“We can just make changes without trying to follow through with the presidential pledges,” said a top political affairs official. “Right now, we just have to go ahead with it.”

The Blue House is pessimistic about a change of course because of Park’s strong determination to follow through with her plan.

While ordering the government to back down from the Aug. 8 tax reform plan, Park said Tuesday, “It’s incredibly important to implement the 140 national tasks that we set forth during the first half of this year.”

The Blue House’s strategy appears to be based on the hope that the economy will improve. Cho Won-dong, senior presidential secretary for economic affairs, said last week that the deadline for the value added tax return deadline for the first half of this year was in July and the revenue was actually slightly higher than what the government expected.

Representative Choi Kyung-hwan, floor leader of the Saenuri Party, also said tax revenues will rise when the overall economic growth rate is higher than 4 percent, and the government will find a way to keep its welfare pledges.

Meanwhile, the main opposition Democratic Party condemned the government’s tax plan as the dropping of a tax “bomb” on the working class. (Bombing metaphors are rife in Korean politics.)

“The Democrats seemed to have forgotten their own promises of wider welfare pledges for everyone,” said Kang Bong-kyun, a former finance minister who served as a chief policy maker of the Uri Party, the predecessor of the Democratic Party. “It is illogical for them to criticize the government’s plan to raise more taxes.”

The Democrats said instead of adjusting income tax credits, increasing tax rates on the super-rich and conglomerates is the solution.

According to the DP’s plan, the government would be able to collect about 30 trillion won more from taxpayers over the next five years by lowering the threshold for the 38 percent income tax rate, the highest, and increasing the corporate tax rate.

That is still far lower than the budget that would have been needed to pay for DP candidate Moon Jae-in’s welfare pledges. During the campaign, Moon’s camp said 129 trillion won should be spent over five years on welfare.

Analysts say upping the corporate tax rate won’t be an effective resolution if the economic recession continues.

“If you increase the corporate tax rate during an economic slowdown, the companies will cut investments and hire fewer people,” said professor Yun of Yonsei University. “Conglomerates will relocate their businesses overseas to dodge higher taxes and jobs in Korea will disappear.”

According to the National Tax Service, revenues from corporate tax during the first half of this year went down by 16.3 percent, or 4.19 trillion won, from the same period last year.

Analysts say a structural problem in Korea’s taxpaying population is the real issue.

“Of the 250 million economically active population, only 11.5 million pay income tax,” said Oh Jung-gun, an economics professor at Korea University. “And the top 20 percent of them are paying 85 percent of the revenues. This is the actual problem.”

Analysts say the government and the politicians must admit frankly to their welfare dilemma and work together to persuade the public to accept some solution - or some compromise.

“For welfare benefits, you have to pay tax. If not, you have to slash benefits,” said a Democratic Party policy maker. “Or else, we have to become a country with deficits by covering up the loss with borrowing.”

“Until now, the politicians were just busy developing free welfare benefits,” said Hyun Jin-kwon, chairman of the Korean Association of Public Finance.

“Now they’ve seen the bill and are shocked by the high price. They have to admit to the people that welfare requires tax revenues and we have to reconsider not just the tax policy but also the welfare policy.”

BY CHAE BYUNG-GUN, SER MYO-JA [myoja@joongang.co.kr]