Will Tax Revenue, Which Increased After the IMF and Financial Crisis, Shrink Like an 'Axe Mouth'?

National Tax Revenue Increased by 19 Trillion Won to 88.5 Trillion Won from January to March... Increase in Real Estate Transaction Taxes
Gap Between Total Revenue and Expenditure Narrows... Likely to Cover Fiscal Deficit

[Asia Economy Reporter Jang Sehee] As the economic recovery has led to better-than-expected tax revenue in the first quarter, changes are also being observed in the so-called "crocodile's mouth (the gap between total expenditure and total revenue)," which often comes up when discussing fiscal soundness. In particular, this year, income tax and corporate tax, which are part of national tax revenue, have not suffered significant damage, and the capital gains tax revenue is expected to increase due to a rise in real estate transactions. There is keen interest in how the strong tax revenue in the first half of this year will influence discussions at the National Fiscal Strategy Meeting scheduled for this week.

◆Shrinking 'Crocodile's Mouth' = According to the Ministry of Economy and Finance on the 25th, national tax revenue from January to March this year reached 88.5 trillion won, an increase of 19 trillion won compared to the same period last year. Capital gains tax increased by 3 trillion won due to the sharp rise in housing prices, pushing income tax revenue to 28.6 trillion won. Capital gains tax revenue was 5.5 trillion won in the first quarter of last year, but this year’s first quarter capital gains tax revenue is likely to exceed 8 trillion won significantly. Professor Kim Woo-cheol of the University of Seoul stated, "The increase in housing transactions and rising sale prices will be the main factors driving income tax growth," adding, "If the economic recovery trend continues in the second half, domestic demand expansion will be reflected, and value-added tax revenue is also likely to increase."

The increase in national tax revenue can lead to a reduction in the gap between total expenditure and total revenue. This gap is referred to as the "crocodile's mouth," meaning that as revenue increases, the extent of the gap narrows.

According to the Ministry of Economy and Finance, the gap between total expenditure and total revenue has steadily widened over the past decade. Total revenue, which was 323 trillion won in 2011, surpassed 400 trillion won in 2016 and is expected to reach 483 trillion won this year with the first supplementary budget. Total expenditure increased from 304.4 trillion won in 2011 to 406.6 trillion won in 2017 and is projected to rise to 572.9 trillion won with this year’s first supplementary budget. While total revenue increased by 160 trillion won over ten years, total expenditure rose by 268.5 trillion won during the same period. However, this year, frequent housing transactions and rising real estate prices are expected to act as factors boosting tax revenue.

◆Tax Revenue Increased Due to Base Effects During Crises = Historical cases also show that tax revenue tends to increase after crises. Following the International Monetary Fund (IMF) crisis, national tax revenue was 67.7977 trillion won in 1998, but it rose to 75.658 trillion won and 92.9347 trillion won in 1999 and 2000, respectively. A similar phenomenon occurred after the global financial crisis, with revenue increasing from 167.306 trillion won in 2008 to 177.7184 trillion won in 2010.

However, whether the "crocodile's mouth" will close despite the revenue increase depends on the government's will. If fiscal conditions improve and expenditures increase further, the crocodile may open its mouth wider and raise its head even more. Lee Ho-seung, Director of the Blue House Policy Office, recently stated, "About 19 trillion won more tax revenue came in during the first quarter of this year," adding, "This has become the basic strength to pursue active fiscal policy."

A government official related to this matter said, "During the crisis, total expenditure increased significantly, leading to a larger deficit," and added, "Even if tax revenue is collected as expected, it will be difficult to cover the managed fiscal balance deficit of 126 trillion won."

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