Lawmakers have begun to drop tax bombs to bankroll the welfare pledges of President-elect Park Geun-hye. They passed the budget bill for 2013 early Tuesday morning together with a set of measures aimed at increasing tax revenue.
This year’s budget was finally set at 342 trillion won, down 500 billion won from the administration’s original proposal submitted last September. Nevertheless, legislators approved bills that would increase the tax burden on rich people as shortfalls are expected in tax revenue this year due to slowing economic growth.
The 2013 budget is characterized by a significant increase in welfare spending. Funds set aside for welfare expansion exceeded 100 trillion won, amounting to a third of the total budget.
To allocate more funds to welfare, the ruling Saenuri Party and the main opposition Democratic United Party slashed expenditures for an array of defense projects, including next-generation fighter jets, K-2 tanks, air-to-ground guided missiles, large attack helicopters and cruise missiles.
They increased the budget for early childhood education and care by 1.05 trillion won to provide subsidies to all families with children aged 5 or under, regardless of their income.
Under the plan, the government will provide some 300,000 won per child to families if they send their children to a day care center or a kindergarten. Families who raise their kids at home will instead receive a monthly allowance of about 200,000 won.
Lawmakers have also expanded the budget for scholarships offered to college students by 1.02 trillion won. The increase was designed to halve the tuition burden of college students from the bottom 70 percent of the households in terms of income.
To finance these and other welfare schemes, lawmakers have agreed to collect more taxes from affluent people and big corporations.
Currently, some 50,000 people who earn more than 40 million won a year from their financial assets are subject to the top income tax rate of 38 percent for their aggregate income. The two parties have lowered the threshold to 20 million won, making an additional 150,000 people subject to the top rate of tax. This measure is expected to increase state revenue by some 300 billion won.
Lawmakers have also decided to introduce a 25 million won cap on income deductions, another tax bomb for those in the upper echelons of the income scale.
For high-income professionals such as lawyers and doctors, the minimum tax rate will be raised from the current 35 percent to 45 percent. Similarly, big companies whose taxable income exceeds 100 billion won will see the minimum tax rate raised from the current 14 percent to 16 percent.
The problem is that the expected revenue gains from all these measures fall far short of the 27 trillion won a year needed to realize the welfare vision of the president-elect. So the two parties have agreed to set up a parliamentary committee to discuss tax reform.
The parties’ move signals that they will push for tax hikes in the years to come to foot the expanded welfare bill. But they need to remember that any attempt to raise taxes could negatively affect the economy by discouraging household spending and corporate investment.
When domestic demand is weak, a better way to increase state spending is to issue government bonds. This approach could impair fiscal soundness if pushed too far. But Korea’s state finances are in good shape, so it has room for a modest increase in government debt.
But before increasing state bond sales, lawmakers should avoid abusing taxpayers’ money for ill-advised, populist plans, such as the approved bill on making taxis a form of public transport to increase state subsidies to taxi companies by a whopping 1.9 trillion won a year.
