A tormenting government

Lee Jong-wha
The author is a professor of economics at Korea University.

Goose feathers are light, soft and warm. Goose down is especially popular for winter jackets and comforters. But geese feathers are picked alive, causing pain. In developed countries, picking feathers from live geese is banned. But there are many places that pick feathers from live geese multiple times in their life span.

“The art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing,” said Jean-Baptiste Colbert, finance minister for King Louis XIV. An economic advisor to former President Park Geun-hye caused a stir by using the quote. Explaining tax reforms, he said that the annual 160,000 won ($135) increase for middle class wage earners was bearable, only to be criticized for his reasoning. To the goose whose feathers are plucked, it was painful anyway, and the high-level official did not understand how the common people felt.

The Moon Jae-in administration and the ruling party are working to raise taxes, including the corporate tax, income tax, property tax, real estate tax, transfer tax, acquisition tax and financial investment income tax. The intention is to raise more from the wealthy and property owners to make up for a shortage of tax revenue and minimize its political burden. It is like selecting fat geese to pluck more feathers. But I am worried that the reckless tax increases will intensify economic distortion and cause pain.

It is just and fair to raise more taxes from the rich. They feel less pain than other groups, and collecting more tax from them helps improve income distribution. However, the high income earners already have a considerable tax burden in the progressive tax system. The highest tax rates for corporations and individuals in Korea are higher than the OECD average, and the inheritance tax is the second highest after Japan. While fair income distribution is certainly a goal Korea needs to pursue, Korea’s per-capita GDP is only 22nd among 37 OECD member countries. Consistent economic growth is just as important as improved distribution. When tax rates for the rich and companies are raised excessively, their motivation to work, invest and pursue innovation will go down, undermining growth and causing damage to all.

In the worst-ever economy, raising taxes would make taxpayers suffer and cause economic distortion. According to the tax smoothing principle, damage can be minimized by gradually increasing the tax rate. The tax on the rich may be increased, but there should be a way to make a hike predictable over several years. A similar mistake was made for the minimum wage increase. In the first two years, the increases were 16.4 percent and 10.9 percent, making small companies and the self-employed suffer. Then the government put the brakes on the hike, with a 2.9 percent and 1.5 percent increase in the third and fourth year. Adverse effects could have been reduced if the minimum wage had increased predictably as it did in past administrations.

Using taxation for political reasons intensifies economic distortion. While the government increases the tax and tries to lower the burden on the majority of voters, nearly 40 percent of Korean workers do not pay income taxes. The burden on the actual taxpayers grew. While housing prices are rising and many non-homeowners are struggling, the government does not acknowledge policy faults, blames homeowners and landlords and imposes heavy taxes on them. As the government’s housing market control becomes more strict, supply of housing will decrease, and quality will go down as houses are not maintained.

This year, Korea is expected to see negative growth for the first time since the Asian financial crisis 20 years ago, and the number of those unemployed is the largest in history, with 1.138 million as of July. With the second wave of the Covid-19 outbreak and the global recovery slowing, an L-shaped prolonged slump is expected. Economic downturn, unemployment and real estate price increases all make the working and middle classes suffer more. In the Moon administration, three economic goals of growth, distribution and stabilization worsened. The government and the Blue House must respond to the overall economic catastrophe with careful economic policies, but their responses are too optimistic and impromptu.

Many average citizens are born with nothing, work harder than others, save up, buy properties and become middle class. They built companies, created jobs and paid taxes diligently to attain the economic development that others envy. The government needs to help their dreams to enjoy economic freedom and prosperity. The government must convert to proven economic policies that fit economic theories, not political theories.

Translation by the Korea JoongAng Daily staff.