[Editorial] A tax increase

The administration says it is planning to save 100 trillion won ($92.4 billion) by cutting non-welfare expenditures during the next five years to help finance President Park Geun-hye’s new welfare programs. But it will be easier said than done, if past experience is any guide.

During her election campaign, Park promised to save 73 trillion won as part of the 135 trillion won she would need to finance her welfare projects. Now the Ministry of Strategy and Finance has upped the amount by 27 trillion won.

Park, who cited the gray economy as another large source of revenue for her welfare, promised to bring a large portion of hitherto untaxed business activities to taxation. But economists say the amount of additional tax collection will not meet her expectations.

Former President Lee Myung-bak had a similar expenditure-saving plan each year. He instructed his administration to save 10 percent of flexible spending, hovering around 170 trillion won each year. But the actual savings were woefully small. They fell below one-third of the target each time, ranging from 5.6 trillion won in 2010 to 2.9 trillion won in 2012.

If so, how will the Park administration make up for the shortfall? Leading economists in diverse fields agreed in their recent joint conference that it was necessary to overhaul the nation’s tax system to increase tax revenues if the Park administration was to make good on her welfare promises. Citing their studies, they said it would not suffice to cut expenditure or reduce the size of the gray economy.

Their findings ran counter to Park’s claim that her welfare projects could be launched without increasing the tax revenues as a percentage of gross domestic product. As the economists said, the Park administration will have to borrow, raise the tax-to-GDP ratio or do both if it is to push ahead with her welfare programs.

The nation can afford to raise the ratio, which stood well below the OECD average of 24.8 percent in 2010. Korea’s ratio was at 19.3 percent in same year. Among the 31 of the 34 OECD members that provided information on tax revenues as the share of GDP, Korea ranked 27th.

Moreover, a recent survey found more than 50 percent of taxpayers were receptive to a proposal to increase tax collections for greater welfare benefits. This should not come as a surprise, given the tax-to-GDP ratio was higher in 2008 than in 2010, at 20.7 percent.