Tax increase irony

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Tax increase irony

Shocked by the fiery public outcry over year-end tax settlements under the new tax code, the government turned inward to reconsider whether the new levies were justified in the first place. Some are suggesting the government be bold and honest by increasing the official tax rates instead of taking the coward’s way out by tweaking taxes here and there to make up for the shortfall in revenue and snowballing cost of welfare problems. Now taxpayers are the ones who are shocked: Their complaints about year-end tax bills may result in an outright tax hike.

If the economy had fared well under the Park Geun-hye administration, the debate would not have been necessary. But things have gone from bad to worse. The government collected 11 trillion won ($9.98 billion) less in taxes last year than originally forecast. The president’s campaign promise to increase social benefits without increasing taxes has become hollow. We have to face the music. If the administration’s ambitious welfare agenda is to survive, taxes must be raised. A compromise would entail a mix of reduced welfare benefits and marginal tax increases.

The opposition party demands higher corporate taxes, and the idea tempts the ruling party. Veteran economic bureaucrats like Kang Bong-kyun and Kim Chong-in have been recommending increases in the value-added tax (VAT). The Organization for Economic Cooperation and Development also advised Seoul to increase indirect levies, such as the surtax. The country’s three official taxes are: income taxes estimated at 59 trillion won for 2015, corporate taxes estimated at 46 trillion won and surtaxes of 58 trillion won. Few politicians would dare to anger the masses by suggesting a hike in the income tax. Since money is short, collecting more tax may be justified. But it is not that simple. It is naive to think more taxes would automatically be collected if rates are raised. Collecting taxes is challenging work, especially when the economy is doing so poorly.

If levies on individual and corporate incomes are raised, business revenues and salaries for workers would be reduced. Corporate and consumer spending would suffer. Business would slow down and people would lose jobs. Income and profit then would become thinner. Higher taxes do not guarantee greater revenue. The economy would only fall into a vicious cycle and depression. Tax increases often translate into economic doom.

So experts suggest increases in indirect taxes, such as the VAT. They estimate about 15 trillion won could be generated if the base rate is raised to 12 percent to 13 percent from the current 10 percent. That would be enough to cover the tax shortfall that totaled 11 trillion won last year. They also argue that since prices are low, people won’t feel a big difference in consumer prices. It is another tax maneuver in the so-called art of taxation or “plucking the goose to obtain the largest amount of feathers with the least amount of hissing,” as Louis XIV’s finance minister, Jean-Baptiste Colbert, famously observed.

But again, it is wishful thinking. If the sales tax goes up, consumption is hurt. Instead of generating revenue of 15 trillion won, domestic consumption could contract further. Even if the government gets its 15 trillion won, it would come at the expense of poorer individuals. Low-income people would be hit hardest. If the cost of a bowl of noodles goes up to 3,100 won from 3,000, people with the least money would be hurt the most.

VAT is paid by consumers. Self-employed business owners pay the lump sum to tax authorities. By the time self-employed business owners receive the bill, they feel they are paying the money from their own pockets although it is from customers. If the business is healthy, the pain could be taken for granted. But it is a different story if the business is hurting. They could pay more taxes even though they earned little. There are 6 million people in self-employed business. Public sentiment turned into violence in 1977, when the country introduced the surtax. Merchants joined students during the democratization movement in October 1979, setting the tax office in southern Seoul on fire.

Japan has been through several traumatic backlashes from sales tax hikes. The Liberal Democratic Party lost its ruling party position in 1989 after it introduced a 3 percent consumption tax. Prime Minister Ryutaro Hashimoto raised the rate to 5 percent in 1997 amid soaring public debt, which ended up pushing the economy further into recession and costing Hashimoto his job. The increase was the beginning of Japan’s 20-year recession.

Considering the incumbent administration’s political skills and drive, it won’t likely dare to push ahead with hikes in the three major levies. Taxes are best raised at the early stage of an administration and onset of economic recovery when the public is likely to be more understanding and tolerant. All the conditions are not right at the moment. The administration is halfway into its five-year term and the economy is mired in a prolonged slowdown. All the vain talk about tax hikes can only wear people down and divide the country. Other imperative reform agendas involving pensions, labor and national insurance also could be affected.

The backlash over year-end settlements underscores that no tax revision is possible without public approval. Before complaining of a lack of funds, it would be wiser to try to come up with ways to save more. It is audacious for the government and politicians to ask taxpayers - individuals or corporations - to pay more without doing their best to make sure it is spent wisely.

JoongAng Ilbo, Feb. 17, Page 28

*The author is deputy editor-in-chief of the JoongAng Ilbo.

by Kho Hyun-kohn

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