Economic crackdown stirs concerns

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Economic crackdown stirs concerns

Last September, in an act of defiance, Jeong Young-soo walked to the front of Chuncheon City Hall, northeast of Seoul, and doused his body with paint thinner. Then, without faltering, he set himself ablaze, the young bar owner’s final protest against a government crackdown to collect more taxes from his industry.

The tragic incident has highlighted an underlying tension as President Park Geun-hye tries to squeeze an extra 27.2 trillion won ($25 billion) in revenue from the undocumented economy. Extra pressure on various groups, from bar owners to doctors to small independent retailers, contrasts with the president’s 2012 campaign promise to reduce the scope of large conglomerates to create space for small- and medium-size businesses.

The clampdown may actually have the opposite effect, said Jean Lim, a Seoul-based economist at the Korea Institute of Finance, a nonprofit research center.

“The more successful and stringent this tax crackdown is, the bigger an impact it will have on reshaping the economy,” Lim said.

“Enforcing tax transparency will get rid of small uncompetitive businesses and lead to an eventual reduction in the number of businesses in the service industry,” he said, adding that chains and franchises may spread.

In a Jan. 10 interview, Park said she was determined to avoid introducing difficulties for small businesses, even while tackling tax evasion.

Korea’s shadow economy was equal to 24.7 percent of gross domestic product (GDP) in 2010, above an average 18.3 percent for 39 countries in the Organization for Economic Cooperation and Development (OECD), and 11 percent for Japan, according to a paper by the Institute for the Study of Labor. The top 10 chaebol, or conglomerates, had revenue equivalent to 84 percent of GDP in 2012 and employed just 5 percent of paid workers, according to data from Ceoscore, a Seoul-based organization that monitors those conglomerates.

Korea’s ratio of 28 percent of self-employed workers is almost four times that of the United States, according to OECD data.

While the government is also targeting tax evasion by big corporations, some small businesses say they see themselves as bearing the brunt of the clampdown.

Stiff competition for jobs in manufacturing and a lack of midsize employers and state-supported vocational schools drive people to establish their own businesses in the service sector, such as restaurants and retail outlets, Lim said.

“This is changing, though,” He continued. “Chaebols are franchising bakeries and chicken shops as they seek new areas of growth.”

As Park seeks extra money to help fund her election promises, investigators are trying to counter tax-avoidance methods, such as bank accounts set up under other people’s names and the purchase of gold bars to hide wealth, the tax agency said. The government misses about 65 trillion won in tax revenue per year due to underground activity, according to ruling Saenuri Party lawmaker Yoo Sung-kull, a former vice finance minister.

Park is the first president to set revenue targets in the battle with tax cheats, according to the Ministry of Strategy and Finance, and aimed to raise 2.7 trillion won last year, 5.5 trillion won this year and a total of 27.2 trillion won by 2017, or 20 percent of the cost of her election pledges over the period.

“The problem is that the crackdown is aggressive, abrupt and insensitive,” said Ahn Chang-nam, a tax professor at Kangnam University in Yongin. “Because fines are being abruptly slapped down, it gives no time for evaders to voluntarily report their wrongdoing?.?.?.?It can easily mean going out of business.”

Doctors are in the government’s sights as well, and “many are afraid of raids,” said Rho Hyung-cheol, a licensed tax accountant and adviser to the Korean Medical Association. “They used to treat raids as passing squalls to hide from, but that’s changing.”

On Nov. 21, Finance Minister Hyun Oh-seok told the National Assembly that the government will “try our best not to make our tax investigations an impediment to normal business activities” and “diligent tax payers and small to midsize entrepreneurs should not be dispirited by the investigations.”

In contrast, Choi Don-gwan, 72, who runs a bar in the city of Taebaek and witnessed the fatal self-immolation last year of his friend Jeong, said he was concerned that Park’s efforts to boost revenue come at the expense of small businesses like his.

“My friend died fighting against this after suffering a whole week in the hospital,” Choi said. “I can’t believe it’s the government that is driving us out of business.”

Bloomberg

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