This Year’s National Tax Reduction 56.8 Trillion Won... Tax Reduction Rate Expected to Exceed Legal Limit for 3 Consecutive Years Due to COVID-19 Response (Comprehensive)

Approval of the 2021 Tax Expenditure Basic Plan at the Cabinet Meeting

[Sejong=Asia Economy Reporter Kim Hyunjung] As the government expands tax support for COVID-19 response and economic recovery, this year’s national tax reduction amount is expected to approach 57 trillion won, marking a record high. The national tax reduction rate, which indicates the ratio of tax reductions to national tax revenue, is likely to exceed the legal limit for the third consecutive year since 2019.

On the 30th, the Ministry of Economy and Finance announced that it had approved the “2021 Basic Plan for Tax Expenditures,” including this content, at the Cabinet meeting presided over by President Moon Jae-in. Tax expenditures refer to the government not collecting taxes that should be collected, effectively functioning as fiscal spending. According to the Restriction of Special Taxation Act, the Minister of Economy and Finance prepares this basic plan annually.

◆ National Tax Reduction Rate Exceeds Legal Limit for Three Consecutive Years = According to the basic plan, this year’s national tax reduction amount is projected at 56.8 trillion won, with total national tax revenue estimated at 300.5 trillion won. The tax reduction rate compared to the revenue budget is expected to be 15.9%, exceeding the legal limit for the third consecutive year since 2019.

Article 88 of the National Finance Act stipulates that the national tax reduction rate must be kept below the national tax reduction limit (the average national tax reduction rate of the previous three years + 0.5 percentage points). If this legal limit is exceeded this year, it will be the fifth time in history, following the global financial crisis years of 2008 and 2009, and the economic downturn years of 2019 and 2020. Notably, the Moon Jae-in administration is the first to exceed the legal limit three times during its term.

The Ministry of Economy and Finance stated, “We will operate tax expenditures focusing on supporting vulnerable groups and restoring economic vitality, while actively reorganizing unnecessary tax exemptions and reductions to comply with the reduction limit. We will thoroughly implement preliminary feasibility studies and in-depth evaluations and actively reflect the evaluation results in tax law amendments.”

Looking at the share of this year’s national tax reductions by sector, support for workers such as the Earned Income Tax Credit (EITC) amounts to 22.8 trillion won, accounting for 40.1%, the largest share. Support for agriculture, forestry, and fisheries is 6 trillion won (10.6%), and investment promotion and employment support is 4.7 trillion won (8.3%). By beneficiary, individual tax reductions amount to 34 trillion won (59.9%), and corporate tax reductions amount to 22.4 trillion won (39.4%). Among individual tax reductions, 68.2% are targeted at middle- and low-income earners, and 31.8% at high-income earners.

Last year’s national tax reduction amount was 53.9 trillion won, with the tax reduction rate estimated at around 15.4%. This was due to strengthening the tax expenditure function to support small business owners and SMEs, investment, and job creation to boost economic vitality. In this regard, the government expanded the scope of VAT reductions for small individual business owners, introduced voluntary rent reduction tax credits, temporarily raised credit card deduction rates, and established integrated investment tax credits.

◆ In-depth Evaluation of 18 Items Approaching Sunset... Preliminary Feasibility Study on Government Bonds = The government also plans to actively reorganize tax exemption and reduction systems approaching their sunset dates based on performance evaluation results. Systems that have already achieved their policy goals or lack effectiveness will, in principle, be terminated or redesigned. Among the total 231 tax expenditure items, 86 items are set to expire this year, totaling 5.2 trillion won. Based on 2019 performance data, this accounts for 10.9% of the total.

The Ministry of Economy and Finance will conduct in-depth evaluations on 18 items with annual reductions exceeding 30 billion won to analyze performance and develop improvement measures. These include tax credits for new growth and original technology R&D expenses, employment increase tax credits, income tax reductions for SME employees, capital gains tax reductions on land for public interest projects, individual consumption tax reductions on hybrid vehicles, individual consumption tax reductions on taxi fuel, and SME tax credits for converting to regular workers.

New tax expenditures this year will be allowed only restrictively when necessary, such as for COVID-19 response, crisis recovery, job creation, innovation growth, and expansion of future growth engines. The newly introduced government bond product for individual investors will undergo a preliminary feasibility study.

Plans are also underway to improve the criteria for judging tax expenditures on individual tax law reduction items and to consider disclosing beneficiary attribution statistics for each tax expenditure item. Additionally, a self-evaluation system will be introduced for each ministry to grade tax expenditure items (excellent, average, poor), with items rated poor generally being subject to sunset termination.

Meanwhile, the Ministry of Economy and Finance plans to notify the basic plan to each ministry by the end of this month and receive tax expenditure evaluation reports and proposals from each ministry by the end of next month, then reflect them in this year’s tax law amendment bill after consultation.

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