"Statutory Ceiling Exceeded for National Tax Reduction Rate... High-Income Earners and Large Corporations Receive Greater Benefits"

[Sejong=Asia Economy Reporter Kim Hyunjung] As tax support measures in response to the novel coronavirus infection (COVID-19) increase, concerns have been raised that the national tax reduction rate is exceeding the legal limit, necessitating management. In particular, it is explained that it is necessary to consider the related allocation effects as the proportion of high-income earners and large corporations among the beneficiaries of tax incentives is expected to increase somewhat.

According to the '2021 Budget Analysis' report published by the National Assembly Budget Office on the 30th, as the scale of tax expenditures has increased recently, the national tax reduction rate, which was around 13.0% in 2017-2018, rose to 13.9% last year, and is expected to expand to 15.4% and 15.9% this year and next year, respectively. Based on the legal limit recommended by the National Finance Act, 'the average performance of the previous three years + 0.5 percentage points or less,' the national tax reduction rate has already exceeded the legal limit since 2019.

Tax expenditures refer to various fiscal supports through tax reductions, exemptions, income deductions, tax credits, preferential tax rates, or tax deferrals. Although not reflected in the budget, since they imply a reduction in fiscal revenue, they are practically similar to fiscal expenditures. Therefore, the Restriction of Special Taxation Act requires the preparation and submission to the National Assembly of a tax expenditure budget report that estimates the amount in a structure similar to the expenditure budget for management and analysis.

However, with the recent increase in tax expenditures due to COVID-19, the national tax reduction rate, which is the scale relative to total national tax revenue, is gradually expanding. In particular, the excess margin is increasing. The 2020 tax expenditure budget report projected that the 2019 national tax reduction rate would exceed the legal limit of 13.6% by 0.9 percentage points to 14.5%, and the 2020 rate would exceed the legal limit of 14.0% by 1.1 percentage points to 15.1%. Subsequently, the 2021 tax expenditure budget report revised the 2020 national tax reduction rate to 15.4%, exceeding the limit of 13.6% by 1.8 percentage points, and forecasted the 2021 rate to be 15.9%, exceeding the limit of 14.5% by 1.4 percentage points.

The government attributes this mainly to the increase in tax support for COVID-19 response, amounting to 1.0786 trillion won this year and 1.811 trillion won next year. However, the Budget Office pointed out, "Even after deducting the tax support portion, the national tax reduction rates for 2020 and 2021 still exceed the legal limit by more than 1.0% each," adding, "This increase in tax expenditures seems to be due to factors other than the COVID-19 response."

It also pointed out that the benefits of the increase in tax expenditures are accruing to high-income earners and large corporations, specifically those subject to mutual investment restrictions. According to the Budget Office's analysis of tax expenditure beneficiaries, the shares of high-income earners (34.39% → 30.29%) and large corporations (20.42% → 11.76%) significantly decreased from 2017 to 2019, but increased from 30.29% to 31.81% and from 11.76% to 14.62%, respectively, from 2019 to 2021.

The Budget Office emphasized, "The government should actively manage the latter factors, considering that causes other than COVID-19 are included in the recent increase in tax expenditures," and added, "While recognizing the necessity of expanding tax expenditures for economic response, the allocation effects among beneficiaries should also be considered."

This content was produced with the assistance of AI translation services.