4 Major Economic Societies: "Reduce Income Tax Exemption Benefits, Increase Individual Consumption Tax, and Implement 'Tax Hikes'"

Professor Park Ki-baek of University of Seoul Presentation
Proactive Measures Needed to Reduce Fiscal Deficit

[Asia Economy Sejong=Reporter Kwon Haeyoung] To normalize the rapidly deteriorated fiscal situation due to the expansionary fiscal policy of the Moon Jae-in administration and COVID-19, the new government should pursue tax increases such as reducing income tax exemption benefits, expanding climate and environmental taxes, and increasing individual consumption taxes in the mid to long term, according to claims.

Professor Park Kibae of the Department of Taxation at the University of Seoul stated in the report "Fiscal Policy Directions in the Post-COVID Era," released on the 31st, "In the mid to long term, small-scale tax increases should be used to secure funding for pledges, normalize taxation on capital gains, and reduce income tax exemptions." This report was presented at a joint academic conference held on the same day at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul, hosted by the four major social science associations (Korean Academic Society of Business Administration, Korean Economic Association, Korean Sociological Association, Korean Political Science Association) under the theme "Tasks for the New Government for Sustainable Development of the Republic of Korea."

According to the report, South Korea's fiscal deficit in 2022 is expected to reach 94.1 trillion won, and national debt is projected to reach 1,064 trillion won, which is 50% of the Gross Domestic Product (GDP). This is why proactive efforts to reduce the fiscal deficit are necessary once the COVID-19 crisis is somewhat resolved.

Professor Park pointed out reducing income tax exemption benefits as a target for tax increases. The proportion of income tax revenue to nominal GDP in South Korea is 4.9%, which is lower than the OECD average of 8.3%. Consumption tax accounts for 7% of GDP, also below the OECD average of 11.1%. Corporate tax is 4.2%, and property tax is 3.1%, both higher than the OECD averages of 3.0% and 1.9%, respectively.

Professor Park suggested, "Capital gains are the core of income tax, so maintaining the current tax system rather than separate tax increases is necessary," and added, "Income tax exemptions with regressive characteristics, such as credit card deductions and earned income deductions, should be reduced." Regressivity means that low-income groups bear a higher tax burden or that high-income groups receive more tax exemptions. Regarding the relatively high corporate tax compared to the OECD average, he said, "It is necessary to simplify the multi-tiered tax rates."

He also argued that increases in environment-related consumption taxes and value-added tax should be considered. Professor Park said, "With growing interest in climate and environment issues, such as discussions on carbon border taxes, restructuring of existing transportation, energy, and environment taxes is inevitable," and added, "Adjustments to electricity rates are also necessary." He continued, "Raising the VAT rate is a sensitive issue, but if necessary, applying individual consumption taxes to certain items to effectively implement a two-tier VAT rate is one method."

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