DP divided over tax, welfare

Are Koreans ready to pay more taxes in return for free school meals, nurseries and medical fees?

How to finance “universal welfare” is now haunting the main opposition Democratic Party after it announced a slew of pledges for broader welfare benefits to attract voters in the 2012 general and presidential elections.

Party members are facing off over how to finance the 16.4 trillion won ($14.7 billion) a year project.

Rep. Chung Dong-young, member of the party’s Supreme Council, ignited the spark on Thursday by suggesting a net wealth tax.

In a seminar, he said the government could secure up to 10 trillion won a year from a 1 percent income tax on those with more than 3 billion won and levying a 1 percent wealth tax on the 36 enterprises with assets exceeding 1 trillion won.

“According to a National Tax Service report, the number of individuals that meet the condition is 270,000, just 0.58 percent of the population. The net wealth tax will be the only way to minimize the shock of tax hikes and reduce economic inequality in society at the same time,” he said.

Chung said Korea’s total tax rate was 19.3 percent, some 7.3 percent lower than the OECD average. “We must admit that the universal welfare system requires a tax increase.”

Chung’s remarks appear to target his in-house rival and party chairman Sohn Hak-kyu, who has repeatedly affirmed that universal welfare without tax hikes was possible through adjustments to the fiscal structure, revenue and expenditure structure while reinforcing some policies.

“Rolling back on tax cuts on the rich and slashing the budget for some wasteful projects such as the four river refurbishment and others could make the whole plan feasible without shouldering any more tax,” he said, showing his disapproval of Chung.

Net wealth taxes were adopted in many European countries decades ago as a way of generating more resources without tax resistance, but they now remain in only a handful of countries such as France, Switzerland, Norway and Liechtenstein.

Sohn and other leaders within the party have indicated that they are against the new tax, insisting universal welfare will create a “virtuous circle.”

The DP’s stance acknowledges the findings of a report by the Korea Economic Research Institute. According to the report, Koreans think that they must pursue universal welfare and that the state must intervene in reducing income gaps among society. But at the same time they are negative on raising taxes to finance the welfare.

Rep. Kang Bong-kyun and several others from financial bureaucratic backgrounds said they will form an in-house committee to study the feasibility of both sides.

“We agree with that we need to expand the welfare programs. But we must take some lessons from failures European countries had faced,” Kang said in a media interview.

Outside the party, the ruling GNP, which has recently suggested “selective welfare,” expanding the beneficiaries to bottom 70 percent of the income bracket, sneered at the DP.

Hong Joon-pyo, the party’s floor leader, degraded the plan as anachronistic and idealistic. “The DP’s plan will create tax bombs,” he said.

“If DP really wants the plan that bad, the party should have executed it 10 years ago, when it was the ruling party,” said Rep. Shim Jae-chul.

“Younger generations, who will have to support the aging society, will be heavily burdened once again,” he said.

The Presidential Council for Future and Vision on Friday suggested to President Lee Myung-bak that making a fine balance between universal and selective welfares is needed. “Welfare should not be a subject of populism,” said Kwak Seung-jun, president of the council.

By Bae Ji-sook (baejisook@heraldcorp.com)