"This Year's Tax Expenditure 56.8 Trillion Won, Exceeding Legal Limit on Reduction Rate... Need to Set Long-Term Reduction Goals"

National Assembly Budget Office Report on "Current Status and Challenges of South Korea's Tax Expenditure Management System"

[Sejong=Asia Economy Reporter Son Seon-hee] It is projected that this year’s tax expenditure will reach 56.8 trillion won. This is an increase of 2.9 trillion won compared to last year (53.9 trillion won). The national tax reduction rate is also expected to reach 15.9%, exceeding the statutory limit (13.3%). There are calls for the government to set mid- to long-term reduction targets and reduce the scale of tax expenditures.

On the 10th, the National Assembly Budget Office suggested in its report titled "Current Status and Tasks of Korea’s Tax Expenditure Management System" that "there is a need to establish mid- to long-term and macro-level tax expenditure reduction measures to overcome the limitations of tax expenditure management focused on in-depth evaluations of individual items."

Tax expenditure refers to granting special tax treatments to taxpayers, reducing the taxes they originally have to pay. While this reduces taxes for taxpayers and provides fiscal support, it ultimately reduces national revenue, meaning it is considered an expenditure from the government’s perspective. Methods include tax reductions, exemptions, income deductions, tax credits, preferential tax rates, and tax deferrals.

However, if such tax benefits are excessively granted depending on economic conditions, there is a risk that government tax expenditures will increase excessively. The scale of tax expenditures has steadily increased each year, reaching 49.6 trillion won in 2019, when the national tax reduction rate hit 13.9%, surpassing the statutory limit (13.3%) for the first time. It is expected to exceed the statutory limit for three consecutive years, including last year and this year.

The government implements measures such as the tax expenditure budget, national tax reduction rate limit system, and tax expenditure performance management system to maintain the scale of tax expenditures at an appropriate level. However, the tax expenditure budget has been criticized for its lack of accuracy in estimation. An analysis of the error rate for 43 items with reduction results exceeding 100 billion won in 2019 showed that 28 items were underestimated compared to actual results, while 15 items were overestimated. Items with an error rate exceeding 5% numbered 29, accounting for about 70% of the total.

Accordingly, the report pointed out the need to establish clear criteria to distinguish between "actively managed targets" and "potentially managed targets" in the tax expenditure report and to develop a mid- to long-term roadmap for reorganizing actively managed targets. In particular, even when in-depth evaluations recommended "reduction or abolition," many cases did not implement these recommendations, highlighting the necessity for thorough post-management.

Kim Tae-min, an analyst at the Tax Estimation and Analysis Office, stated, "The current tax benefit performance management system, which focuses on in-depth evaluations, is centered on individual items, so there are limitations in reducing tax expenditures from a comprehensive perspective. It is necessary to set target levels for tax expenditure reduction, prioritize between systems, and prepare an integrated plan to reduce the scale of tax expenditures."

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