Tax rate truths

Money is at the heart of the partisan bickering over a new pension scheme for seniors. It would be wonderful if the country could afford to pay the same basic living allowance to all senior citizens. But it cannot. It can’t afford to. That’s why the president and the ruling party have scaled down their basic pension program at the cost of their credibility, since the president and the party have repeatedly promised to fully honor all promises made on last year’s presidential campaign trail.

In fact, the basic pension scheme is maintained only in its framework. The amount that will be given to seniors will differ depending on their income and how much they have put into - and therefore how much they will get out of - the national pension system.

Strangely, the main opposition Democratic Party is more emotionally attached to the president’s campaign promise than the president herself. It even came up with an idea for the government to keep its promise of offering the same monthly cash allowances to all senior citizens. It suggested that the government fund a universal program by scrapping tax cuts for the wealthy and big companies offered under the previous Lee Myung-bak government. The opposition came up with this face-saving measure to lend a hand to President Park Geun-hye and the Saenuri Party and help them keep their promise. How unselfish of it.

In fact, what the DP proposes does not make sense nor is it workable. The Lee administration never cut taxes for the wealthy in the first place. It is true that the previous conservative government attempted to lower taxes for the rich as it proposed reducing rates on income and corporate taxes. But its attempt was foiled by strong protests from the opposition. The income tax code was instead revised to lower the rates for the middle-income and lower brackets while keeping rates on higher incomes unchanged. And the highest tax rate - 38 percent - was created for individuals earning more than 300 million won ($279,329) a year. The Lee government proposed to lower to 20 percent the 22 percent rate for corporate income of more than 200 million won. The maximum tax rate remained the same for companies generating profits of more than 20 billion won. The rate on companies with income below 20 billion won was lowered.

It doesn’t make sense to axe a tax benefit to the rich that was never given.

If the DP was referring to the levies on the middle- and lower-income brackets and midsize companies, that’s an entirely different story. The party is including the middle class and midsize companies in the “rich” bracket. Its argument would suggest hikes in taxes on individuals earning 12 million won and small companies earning 200 million won a year. We hardly think the party is so suicidal as to make that proposal.

I also have to point out two misleading facts about taxes. First of all, it is wrong to believe that more taxes will be collected if rates are raised. Tax revenues will increase if the base figure remains the same or increases and the tax rate is raised. But revenues can actually decrease if the base figure falls. If incomes fall due to natural disasters, slow business and a sluggish economy, tax revenues will decrease even if the rates are hiked. A hike in tax rates can, in fact, lead to a reduction of the base figure. People will be discouraged from working harder because more income means more tax paid. No one enjoys paying taxes. If tax rates go up, people will be tempted to find ways to pay less. Higher taxes in hard economic times most likely will hurt tax revenues.

Secondly, it is wrong to believe the rich deserve to pay more taxes. It is difficult to define who is rich. Is someone rich depending on how much he or she earns a year? Are large companies rich and midsize not? Are chaebol groups rich and large companies without an owner family not? What exactly are our guidelines on the rich? Even if we do come up with guidelines, what license does the government have to collect more taxes from them? If people and companies make a great deal of money from honest and hard work, they are running a good business. They are already shouldering the lion’s share of tax revenues anyway. It does not make economical or ethical sense to levy punitive taxes on lucrative businesses.

Taxes are levies the state imposes on private earnings. They should be based on fair cause and reasonable grounds. According to the Hauser’s law, a proposition made by the economist Kurt Hauser, tax revenues in the United States averaged around 19.5 percent of the gross domestic product between 1950 and 2007 regardless of cuts or increases in tax rates. Tax revenue therefore depends on growth in the economy, not changes in tax rates. If the government wants to boost tax revenue to fund welfare, it must try to promote growth in the economy.

*The author is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo