Crack down on black economy first, says LG report

A prominent think tank said it would be far better if the government filled its tax coffers by cracking down on the so-called “black economy” rather than increasing taxation.

According to LG Economic Research Institute, the so-called underground economy where people pocketing profits from undeclared or illicit business practices as of 2012 is estimated to be worth 314 trillion won ($296 billion). This is almost as large as the government’s annual budget of 325 trillion won.

The report noted that the government failed to even collect half of what it could from the black economy. Based on findings by the International Monetary Fund, the Korean government has failed to maximize its tax collections.

An IMF study said Korea’s tax revenues were only 48 percent of their potential maximum last year. This is far lower than the 70 percent of the average advanced economies or even 69 percent of emerging economies.

The reason behind the low collection of potential tax revenue is because of Korea’s large underground economy. The ratio of its underground economy to the nation’s GDP was 24.7 percent as of 2010. This is higher than 9.1 percent in the U.S., 11 percent in Japan and 12 percent in the UK.

The LG ERI report pointed to tax evasion by small and private entrepreneurs as one of the biggest culprits. The underground economy perpetrated by such small private businesses is estimated to be roughly 139.2 trillion won as of last year. Some 38.2 trillion won in taxes are evaded.

“[A study showed] that 57 percent of small entrepreneurs such as restaurateurs and golf practice facility owners, who are largely paid in cash, evaded taxes,” said Cho Young-moo, LG ERI senior economist. “Basically if a person makes 1 million won, they don’t report 570,000 won of those earnings.”

Cho stressed that the tax evasion rate of private entrepreneurs with high incomes has basically leveled off since 2009.

The biggest reason behind this is the issuance of the 50,000 won note. In 2009, the Bank of Korea started printing 50,000 won notes. Thanks to the 50,000 won note, it has become more convenient to stash hard currency than when the largest note was 10,000 won.

The circulation of 50,000 won notes is shrinking and analysts think many people are stocking up on the notes as the tax authorities intensify their monitoring of purchases on credit cards to track down spending habits and possible tax dodging.

BY SOHN HAE-YONG [ojlee82@joongang.co.kr]