Taxing matters

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Taxing matters

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Kim Jong-soo

Everyone wants to boast about what they are good at and obscure what they are not. A government is no different. On the subject of the economy, the administration of President Park Geun-hye has little to advertise. The economy has grown since Park became president, but at a snail’s pace of 2.8 percent last year. The youth employment rate fell to a record low. The only positive area was consecutive, record surpluses in the current account. But those, too, were not really achievements worth boasting about because they were mainly caused by falling imports due to depressed local demand. The government’s single numerical goal - an overall employment rate of 70 percent - remains dubious.

On the flip side, the government has plenty to sweep under the rug, like the huge hole in the national budget. Soon after Park’s inauguration last year, the government pledged to boost spending on welfare benefits and stimulate the economy. It hoped to increase tax revenues by digging up unreported, underground economic activity. The results have been disastrous. Tax revenues fell way below estimates and the government could not carry out its promised spending. It tried to rush the disclosure of last year’s settlement records hoping nobody would pay much attention.

But how a government manages public finances is not a matter to wish away. Budgetary income and expenditures are central to the government’s performance, and every government has a duty to disclose in detail how much money it collects from the people and what it does with it. It is strange that even the opposition, which is supposed to keep an eye on the government’s performance, has been silent on the issue.

It doesn’t take a genius to figure out that the government’s budgeting was unrealistic from the beginning. The government pledged massive welfare spending with funds it hoped to raise from additional taxes on previously unregistered or underground economic activities. The settlement report proved how naive the government was.

Tax revenues last year totaled 292.9 trillion won ($274.79 billion), as much as 10.9 trillion won below target. Income taxes increased, but corporate and capital gains taxes and stock transaction taxes fell sharply. Corporate taxes were down due to poor corporate performances. A decrease in capital gains and stock transaction taxes reflected a slump in the real estate and stock markets. In short, revenue fell due to a sluggish economy. The government’s crackdown on the underground economy fell short of covering up losses from a lethargic economy.

Because the government was short on funds, it could not spend as planned. Expenditures totaled 286.4 trillion won, 18.1 trillion won less than the budget. Welfare spending was scaled down due to the delay in implementation of a new basic pension for low-income senior citizens. But the government turned over-anxious about spending because of the reduced tax revenue. It failed to carry through its promise last year of reinvigorating the economy by raising a supplementary budget. The government missed its revenue and spending targets. It was poor in planning and implementation.

The problem is that it doesn’t appear the government will do any better this year. The government targets national tax revenues of 218.5 trillion won for this year - 8.1 trillion won more than the estimated figure in last year’s budget and 16.6 trillion won above the actual amount collected. It still maintains it can dig up more from the underground economy. It clearly has not learned from last year’s performance that tax revenues cannot be increased unless the economy is doing well. There is no guarantee that the economy will turn around and that the real estate and stock markets will suddenly pick up this year.

From the looks so far, the government cannot meet its estimates. If it carries out spending based on such an unrealistic income estimate, we are bound to see an entirely different settlement report around this time next year. The government is building a house on sand if it lays out extravagant spending plans with no realistic financing means.

The opposition Democratic Party is of little assistance. It suggests raising tax rates in order to increase revenue. But tax hikes will only further dampen consumer and corporate spending appetites and slow the economy, translating into less tax revenues. That’s no solution at all.

The government and politicians need to face the music and be honest with themselves and the people. Currently, there are no practical means to increase tax revenues. Without going into further debt, expenditures also cannot grow. This is where they should start discussing this year’s spending plans. What use is planning if it is bound to fail?

JoongAng Sunday, Feb. 16, Page 31

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

By Kim Jong-soo

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