Newspaper readers know that the Park Geun-hye government needs at least 135 trillion won ($120 billion) over the next five years to carry out welfare programs pursued by the new president. Rather than increasing taxes on the rich (or reducing the scale of tax cut for larger businesses), the new administration will concentrate its efforts on exposing tax sources hidden in the “underground economy.” It is a good policy for which everyone breathing in this country can play a part because we all are involved in it, advertently or inadvertently.
This March, my car became 10 years old. Logging 165,000 kilometers on the odometer, this SM525V still runs like new thanks much to the skilled care of the mechanics in my neighborhood. Earlier this month, I replaced all four tires, six spark plugs and distributors there, and the electrical parts in the southeastern city of Pohang where I visited my brother-in-law.
When I asked about the cost of changing tires at the car center, the chief mechanic said that the four-piece package of 16-inch tires was priced at 560,000 won. They would cut the price to 520,000 won if paid in cash. Succumbing to the temptation of saving some money ― and out of friendship built over many years of satisfactory service ― I made the transaction in cash. In Pohang, the spark plugs and distributors cost another 500,000 won, which I paid with my credit card.
While driving, I felt good with the softness of the new rubber, but I had a vague sense of regret for having done something illegitimate. I might have become an accomplice in cheating the government if the garage owner did not include the sale to me in his tax report. It was likely I helped expand the nation’s underground economy by half a million won with this purchase and caused a reduction of the government’s tax revenue accordingly.
There are varying estimates of the scale of the Republic of Korea’s underground or unorthodox economy. The Korea Institute of Public Finance put it at 19.2 percent of the nation’s gross domestic product in its 2011 study, while the private LG Economic Research Institute and the Hyundai Research Institute have calculated it as high as 28.8 percent and 21 percent, respectively.
With the 2012 GDP estimate of 1.237 quadrillion won, the Korean economy keeps some 237 trillion to 356 trillion won worth of goods and services away from the tax authorities. If the average tax rate of 19.3 percent is applied, the government can add 45 trillion-68 trillion won to its annual revenues. Even if half of the underground economy were brought out into the open, there would be enough money to provide all welfare services for the needy as President Park contemplates. If just 1 percent is exposed, it can still generate some 600 billion won in tax revenues each year.
But everyone knows that these figures are an illusion. We perceive the formidable existence of an underground economy in our everyday living. There are millions of small-time merchants for whom the difference between the taxed and untaxed sales means a lot. We meet numerous occasions where the seller demands payment in cash with or without offering a discount.
Yet, the portion shared by people like my auto mechanic, or the owner of the seolleongtang house who seems more pleased if I pay in cash, or the saleswoman at the clothes shop in Yongsan who insists on paper money is minimal compared to what the bigger players are routinely doing. To name a few, there are the private money lenders in Myeong-dong, the plastic surgery clinics in Apgujeong-dong prospering with Chinese and Japanese customers, and hundreds, perhaps thousands, of lawyers who report fictitious figures as fees from their clients.
Recent TV programs have exposed prevalent discounts on cash payments at cosmetic surgeries although it is unclear how much effect they had on them. Underreporting prices on contract papers in real estate transactions to pay less in capital gains or acquisition tax is still practiced, often arranged by agencies desperate to make a deal. Old documents of this type bearing the names of Moon Jae-in and Ahn Cheol-soo appeared during the last presidential campaign to embarrass the candidates.
In the legal community, new lawyers who begin practicing right after retirement from the court or prosecutors’ offices earn exorbitantly high incomes thanks to the persistent tradition of favoritism for old colleagues. But neither these individuals nor the law firms they belong to are properly taxed for such earnings. A lawyer friend of mine explained the mystery: The counsel’s fee, usually a cut from the value of the contested asset, is directly delivered to the lawyer from the winning client in the suit. (Here I realize that there’s basically no great difference between my discounted cash payment at the garage and these lawyers’ erratic practices.)
Our society has uncountable ways and means of hiding financial transactions to evade taxes. But some of the greatest contributors to maintaining the immensity of the underground economy, to our great regret, are the taxmen themselves. One recent report on the investigation of a special tax probe team from the National Tax Service drew my attention, though it was not particularly surprising.
The team of nine tax officials was accused of pocketing 300 million won in kickbacks from enterprises they were assigned to for close scrutiny. The chief of the team is alleged to have taken 20 percent of the total, the two senior members shared a lesser percentage each and the rest was divided among the remaining six members. It is anybody’s guess that how much tax the enterprises were able to save through this bribery, which no one in this country believes to be an isolated case.
President Park named a new NTS chief who is known to have specialized in tackling the underground economy. We can read her resolve to explore new sources of tax revenue from the hidden economy as the success of her welfare programs is closely linked to it. In pushing through her refors, she is reminded that the underground economy also offers a vital handhold for the survival of many people who are the targets of the new government’s welfare projects.
By Kim Myong-sik
Kim Myong-sik is a former editorial writer of The Korea Herald. ― Ed.
