Expanding welfare spending without impairing fiscal soundness is a feat the ruling Saenuri Party is required to perform to carry out the election pledges of President-elect Park Geun-hye.
The easiest way to achieve the feat is to increase tax revenue by raising tax rates or creating new taxes. But Park has ruled out this facile option. During the campaign period, Park said she would not tinker with tax rates.
Instead, she said she would cover 60 percent of her welfare bill by adjusting the government’s spending priorities and streamlining welfare systems, and the remaining 40 percent by scaling back tax breaks and expanding the tax base.
The ruling party estimates Park’s welfare schemes would cost the next government an additional 131 trillion won during her five-year term, or 26.2 trillion won per year. The immediate funding requirement for next year is estimated at 6 trillion won.
Raising an extra 6 trillion won of tax revenue without hiking tax rates is by no means an easy job. But a more serious problem is that the new administration’s funding needs will soar going forward.
Before the Dec. 19 election, the opposition Democratic United Party demanded that the government’s budget for 2013 be expanded by 3 trillion-4 trillion won to increase welfare expenditures.
The ruling party had rejected the demand. After the election, however, the table has turned. Now the Saenuri Party is begging the DUP to agree to expand the budget.
But the room for budget expansion is small unless tax rates are jacked up. The two parties are to pass a set of bills aimed at curbing tax breaks during the parliamentary sessions slated for today and tomorrow. But the expected revenue increase is a mere 500 billion-600 billion won a year.
Their schemes include a plan to introduce a tax deduction ceiling for high-income employees. If the ceiling is set at 25 million won as planned, some 30,000 to 50,000 people are expected to see their income tax deduction benefits dwindle. But the projected tax revenue increase is not more than 100 billion won a year.
The two parties will also lower the threshold financial income that triggers the imposition of the global financial income tax from the present 40 million won to 25 million won a year.
This adjustment would increase the number of affluent people subject to the top income tax rate of 38 percent from the current 50,000 to around 130,000. But it will only boost the government’s tax income by 200 billion won a year.
The ruling party is also seeking to expand the tax base by bringing into light the nation’s large underground economy, which is estimated to account for between 19.2 percent and 28.8 percent of its gross domestic product.
When the shadow economy is assumed to take up 24 percent of GDP, it would amount to 372 trillion won. The party calculates that tax revenue would increase 1.6 trillion won a year if the tax office manages to legalize 6 percent of black market transactions.
Not a small sum. But still not enough to foot the large welfare bill.
The key to shining a light on the underground economy lies in allowing the National Tax Service to access financial transaction data held by the Korea Financial Intelligence Unit.
The FIU collects financial transaction information from domestic financial companies. But currently the tax authorities’ access to FIU data is strictly restricted to protect the privacy of financial service users.
If the NTS can view FIU data, it would be able to ferret out tax dodgers and tax evasion attempts, such as underreporting of transactions, more easily. So the Saenuri Party is set to revise the law on the FIU to help the tax office tackle the shadow economy.
Yet despite these measures, the party won’t be able to raise 6 trillion won next year. So its floor leader has suggested issuing government bonds to cover the shortfall.
But the DUP opposes this idea, saying that it is an approach worse than raising tax rates because it amounts to passing the current generation’s debt to the next generation.
The ruling party’s efforts to increase welfare expenditures without hiking tax rates are laudable. The approach will help expand the tax base and enhance justice in taxation.
But it has limits in financing President-elect Park’s welfare schemes. Therefore, the party needs to draw up a detailed, long-term funding plan rather than promoting half-baked measures.
