The scariest taxIn 1970s, South Korean strongman Park Chung Hee had two priorities — beefing up economic and military power. In the economic field, his regime invested in heavy industries and petrochemicals. To strengthen the military, it focused on development of indigenous weapons systems.
Both required astronomical amounts of financing. But revenues from income and corporate taxes in an underdeveloped economy were small. New tax revenue was needed.
At the time, complicated indirect taxes also required rationalization. This is how the regime came up with the idea of a value-added tax. By combining indirect levies, it instituted a 10-percent blanket valued added tax (VAT) in July 1977.
That was 40 years ago. Taxes are once again in the spotlight. The liberal administration under President Moon Jae-in floated the idea of a higher levy on the incomes of the rich and big companies. It has proposed a new top tax bracket for the highest income-earners and companies.
Choo Mi-ae, head of the ruling Democratic Party, glorified this idea as an “honor tax,” demanding from the wealthy a contribution befitting their prestige to help ease our economic polarization. But the opposition criticized the move as a “stratifying” tax. People’s Party interim head Park Joo-sun claimed that the levy will merely deepen conflict among different classes.
They may differ on tax hikes but the rival parties all agree on the need to broaden the tax revenue base. Our society demands greater tax contributions for greater benefits. Current welfare spending — which is among the lowest among members of the Organization for Economic Cooperation and Development (OECD) as compared to gross domestic product — is too small to ease the discrepancies in income and wealth. It is positive that the tax debate has been motivated by a consensus for social welfare improvement.
Among taxes, a VAT is the most feared type by politicians. Few have dared to confront the issue over the last four decades. It is that explosive. The VAT is levied on the manufacturer and vendor of the goods and services they provide as well as the consumer on the receiving end. It is levied on a taxpayer’s consumption of goods and services regardless of his or her income.
Critics call the VAT unfair because the levy is basically the same for a millionaire and someone who lives on the minimum wage. The tax system typically benefits high income-earners more than low-income earners struggling to make it on a paltry monthly income as they have to pay a much higher proportion of their income on the tax than their wealthy counterparts.
VAT revenues, however, are too big to ignore. According to the finance ministry, the state collected 61.8 trillion won ($55 billion) in VAT, which made up a quarter of national tax revenue of last year. It is the second biggest contributor to the state coffers after individual income tax revenue of 70.1 trillion won.
A one-percentage-point hike would bring in an extra 6 trillion won a year whereas the new levy on big companies and rich individuals would raise 3.8 trillion won annually. Since welfare spending benefits all, a blanket VAT hike would be the fairest fund-raising means.
Half of individuals (46.8 percent) and companies (47.1 percent) in Korea did not pay any tax last year. It is unfair to ask the super-rich who makes up less than 0.1 percent of the total population to pay more, while half the population does not pay anything.
The Korean economy has progressed miraculously over the last four decades. The OECD also advises Seoul to raise VAT rates to increase welfare spending. The average VAT rate of OECD members was 19.2 percent last year.
The ruling power may be fearful of bringing up the issue of a hike in the VAT for good reason. The first target of violent demonstrations against the dictatorial regime in 1979 was the southern Busan district tax office. That year, the Park Chung Hee regime ended.
Tax hikes are a challenge for all governments. But an administration has a duty to revise the tax code to ensure fairness in taxation. When the VAT rate goes up, the burden will be felt more on the low-income class. But tax, in theory, does not go to waste. It returns better social welfare and benefits. When all taxpayers do their fair share, the government can demand the super-rich do more.
JoongAng Ilbo, July 31, Page 24
*The author is the business news editor of the JoongAng Ilbo.