KDI "To Expand Fiscal Revenue, Consider Raising Income Tax and VAT by 1%P Each"

[Asia Economy Sejong=Reporter Son Seon-hee] A national policy research institute has suggested that to manage the rapidly increasing national debt following the COVID-19 crisis, tax increases on universally applied tax items such as value-added tax (VAT) and income tax are necessary.

On the 24th, the Korea Development Institute (KDI) published a report titled "Policy Tasks to Expand Fiscal Capacity after COVID-19" and proposed three major policy tasks including this suggestion.

During the COVID-19 crisis response, the national debt ratio of OECD member countries increased by an average of about 15 percentage points, indicating a deterioration in fiscal conditions. South Korea’s national debt ratio, which had been maintained at around 35% until 2018, is expected to rise sharply and approach 60% by around 2025.

Considering the increasing welfare expenditures of a fixed nature due to population aging, the fiscal outlook is not optimistic. According to the report, the national debt ratio is projected to reach approximately 144.8% by around 2060. In other words, the national debt will exceed the gross domestic product (GDP) by about 1.5 times.

The report argues that "universal tax increases" are necessary as a measure to expand fiscal capacity to manage such excessively increased debt. Kim Hak-su, Senior Research Fellow at KDI, stated, "To smoothly meet the expanding welfare fiscal demand, a certain level of tax increase is unavoidable," adding, "To secure additional fiscal capacity, it is possible to consider raising the effective tax rates of income tax and VAT for all taxpayers by 1 percentage point each." He further noted that by reforming various tax exemption and reduction systems, which are effectively equivalent to expenditures, an additional KRW 2.86 trillion in tax revenue could be secured.

However, Senior Research Fellow Kim emphasized, "It is important to note that OECD countries have expanded the tax burden on VAT and income tax, which impose relatively low excess burden on government revenue collection, while not increasing the burden of corporate tax, which causes economic inefficiency."

He also stressed, "This should be carried out on the premise that the method of calculating local education finance grants is reformed first." He has consistently emphasized the need to reform the local education finance grants, which are allocated at a fixed rate (20.79%) from domestic tax revenue within central government finances.

KDI also pointed out the need for additional control over discretionary spending. If the ratio of discretionary spending to nominal GDP is further reduced by 0.023 percentage points annually from 11.8% between 2031 and 2060, it is estimated that the national debt ratio could be lowered by an additional 10.1 percentage points by 2060.

Senior Research Fellow Kim stated, "Strong policy leadership from the government is required to implement fiscal reform-level policy tasks," and at the same time emphasized, "The social commitment to use the given fiscal resources as sparingly as possible and to ensure that more benefits return to the taxpayers should be concretized through the 'legislation of fiscal rules.'"

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