It took less than a day for Finance Minister Hyun Oh-seok to come up with a revised tax reform plan after President Park Geun-hye sent the original version back to the drawing board.
Park told officials Monday to start again from scratch as the ministry’s proposal triggered a massive outcry from middle-income taxpayers. The plan proposed to collect more taxes from workers with annual income of 34.5 million won or more.
On Tuesday, Hyun briefed the leaders of the ruling Saenuri Party on the amended scheme. According to reports, it calls for raising the threshold income for increased taxes to 55 million won, which the ministry says is the ceiling for the middle class.
Under the new version, the number of workers subject to tax hikes is estimated at 2.1 million, less than half of the 4.3 million under the scrapped proposal.
Thus, the new scheme addresses complaints from middle-income households. Yet the problem is that it is not specific about how to compensate for the expected shortfall in tax revenue.
The ministry rules out transferring the burden to corporations or high-income workers. It says the tax office will strengthen tax audits on high-income self-employed professionals, such as lawyers and doctors, who are believed to underreport their income.
The measure does not sound convincing, however. There is no guarantee that the tax office will be able to cover the shortfall by levying more taxes on tax dodgers.
To finance Park’s 135 trillion won welfare package, the tax office has declared war against the underground economy. Yet there are troubling signs that the shadow economy is expanding. One such sign is the gradual increase in cash transactions.
This takes us back to the fundamental question: Is it possible to finance Park’s welfare schemes without increasing taxes, as she has repeatedly pledged?
When Park says she won’t increase taxes, what she means is that she won’t create new taxes or raise tax rates. To her, increasing tax revenue by abolishing or scaling back tax reductions or exemptions does not constitute a tax hike.
This is doublespeak. From a taxpayer’s standpoint, any increase in the tax burden is a tax hike, be it through a higher tax rate or through a reduction in tax exemptions.
This explains taxpayers’ revolt against the government’s tax plan, which proposes to increase tax revenue by reducing expenses, such as educational and hospital bills, which are exempted from taxable income.
Tax officials insist the plan is not one for a tax hike. But taxpayers feel otherwise. What the episode tells us is that taxpayers are not willing to tolerate any increase in their tax burden to finance welfare expansion.
Now it is time for Park to face reality and think again about how to foot her welfare bill. As she pursues universal welfare, the method of funding it should be universal in nature.
This means she needs to consider raising consumption taxes, which spreads the funding burden among all consumers. If she finds this option difficult to adopt, then she has no choice but to scale back her welfare programs.
Park needs to pay attention to the staggering 10 trillion won drop in tax revenue in the first half of the year from a year ago, which makes her schemes look increasingly unsustainable.
