No time for fuel tax relief
The author is an editorial writer at the JoongAng Ilbo.
“The economy also works on rules, and policies should be in sync with those rules. How can there be a panacea?” This sentiment is not from an economist, but from former President Roh Moo-hyun, who was attacked and derided by the conservative opposition and media as a president who had failed in regard to the economy. This comment on the economic policy of his five-year administration was made at a New Year’s gathering at the Blue House in January 2008 before Roh’s term ended the following month.
The presidential comment was a proud admission that he had not resorted to any artificial stimulus measures to boost the economy during his term. His remarks also could have served as advice to Lee Myung-bak, who won the presidential election in December 2007 and regained ruling power for the conservative forces after a decade by pledging to deliver an economy growing at an average annual rate of 7 percent, achieve per capita income of $40,000 and have Korea be ranked seventh in the global economic scale within 10 years.
President Roh was not lying when he said he had refrained from resorting to emergency makeshift economic measures in his final year. In 2007, prices of Dubai crude, which accounted for more than 80 percent of Korea’s total oil imports, topped $80 per barrel and neared record-high levels. Roh came under pressure to lower taxes on fuel. Like all presidential candidates who vowed to increase our minimum wage in the May 2017 election, the contestants in 2007 promised to shave fuel taxes. Moon Kook-hyun, head of the Creative Korea Party, promised a cut of as much as 30 percent. Lee Myung-bak of the Grand National Party pledged to slash 10 percent and Chung Dong-young of the ruling party 20 percent. Kwon Young-ghil of the union-backed Democratic Labor Party was the sole critic of oil tax cuts, calling them a short-sighted and populist move.
Kwon’s argument was in line with the party’s progressive and green platform on reducing energy consumption and carbon emissions. Even as the candidate from his own party joined the chorus, the Roh administration put its foot down on fuel taxes. In fact, it was doubtful if gasoline prices at the pump would really be lowered from a cut in taxes due to the country’s complicated distribution structure. Roh also feared over-consumption of fuel. Lee kept his campaign promise and slashed oil taxes by 10 percent when he took office in 2008.
Many people would approve of Deputy Prime Minister and Finance Minister Kim Dong-yeon’s proposal for a temporary fuel tax break. Who does not like tax relief? But before putting the idea into action, the government must think again.
First of all, is a tax cut that urgent at this stage? Dubai crude prices are hovering around $80 per barrel. In 2008, they climbed up to $140. A former minister underscored that the tax break should be reserved until oil prices move as high as $120. What option would the government have if it wastes its ammunition now? The Ministry of Strategy and Finance claims that retail gasoline prices these days are similar to levels in 2008. But given the inflation over the last decade, that claim is not convincing.
Second, even if taxes are shaved, they do not necessarily bring down the retail prices at gas stations. In 1999, fuel taxes were cut by 51 won ($0.05) per liter (0.26 gallons), but gas prices fell by a maximum of 9 won. The tax break hardly helped in 2008 as well due to a continued upward spiral in international prices. The move cost us tax revenues of 1.4 trillion won.
Third, the government should be careful with public finance management. Tax revenues fortunately increased by nearly 24 trillion won over the first eight months compared to a year-ago period. But according to the national public finance plan for 2018-2022, the combined fiscal balance that includes the social security fund will go into the red from 2020, and the losses would only grow bigger later. As the fiscal balance reflects the integrity of public finances, any excess tax revenue should be spent to reduce government debt.
Fourth, the proposal to cut fuel taxes is not backed by a strong philosophy. The government argues the move will ease the burden on our working class, but the tax break will help high-income earners more than people making low incomes, according to a study by the Korea Institute of Local Finance in 2012. The tax cut also goes against the liberal government’s policy direction of reducing fossil fuel consumption to help combat fine dust and carbon emissions. The progressive party has opposed a fuel tax cut in the past because of the impact on the environment. Why are the liberals in the Blue House and government keeping mum? As their revered late President Roh said, there are rules in the economy that should be kept.
JoongAng Ilbo, Oct. 19, Page 32