[The Editors' Verdict] Let's Return to Basics

The reason why economic systems and policies are difficult is mostly related to the work motivation of economic agents. For example, income tax is proportional to income. Moreover, it is progressive. The higher the income, the more taxes must be paid proportionally, or even at a higher rate. Therefore, it is natural that work motivation to earn more income decreases.

There was a theory that lowering the income tax rate would actually increase tax revenue. When the tax rate is excessively high, lowering the income tax rate increases the work motivation of economic agents, thereby increasing labor supply and income accordingly. At this time, the increase in income itself is proportionally greater than the decrease in the income tax rate, so the product, tax revenue, actually increases. This theory was systematized as the so-called Laffer curve.

Ronald W. Reagan, the 40th president of the United States, applied this theory to actual policy. A believer in conservatism, he thought that the government taking more than one-third of income as tax was theft. Therefore, he lowered the highest income tax rate in the U.S. accordingly. The theory supporting Reagan’s policy is the aforementioned Laffer curve. Reagan’s policy is also called Reaganomics, and more broadly, supply-side economics.

During the severe recession in the early 1980s, Reagan’s policy stimulated the economy but tax revenue decreased significantly rather than increasing. Today, the huge U.S. fiscal and trade deficits began then. This is the so-called twin deficits. Ultimately, Reagan’s tax cuts eloquently showed that policies conceived ideologically in one’s mind are difficult to succeed.

Currently, discussions about basic income are heated. Since the U.S. provided disaster basic income, no one opposed it and followed suit. And in that extension, the idea of institutionally introducing basic income is gaining great momentum. I want to ask why this country is becoming so reckless. Are we trying to fail like Reagan by ideologically conceiving policies that no other country in the world has dared to even attempt at the national level?

We do not have the luxury like the U.S. This means we do not have the issuing power and influence that the U.S. holds in the international community. If we accumulate fiscal deficits like the U.S., our economic crisis will come much sooner than expected. The social weak and low-income classes bear the greatest burden of the crisis. Paradoxically, I cannot shake the thought that basic income will eventually drive them to the streets. Recall the foreign exchange crisis not so long ago. Who suffered the most pain then?

It is said that Finland, Canada, the U.S., India, and Namibia experimented with basic income targeting minority groups. What were the results? There is no meaningful conclusion anywhere. Yet such a policy is being introduced in Korea. Populism is soaring. Who opposes making a truly livable country? Is such a country one that distributes cash? Before discussing basic income, it is time to seriously consider how to reform and expand existing welfare and social safety nets.

The basic income discussion is not urgent for us at all. Ultimately, true reform will be delayed and only lead to wasteful political strife. Basic income is a policy without a foundation. Especially at times like this, we must look long-term and design policies carefully. Thinking of public finances as free money is an excessive luxury for us. Let us stop thinking only about regimes and elections and return to basics.

Jo Jang-ok, Professor of Economics, Sogang University

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