Face washing down 65 trillion+ over 5 years... Growing concerns over fiscal contraction

[Asia Economy Sejong=Reporter Dongwoo Lee] It is projected that the revenue loss due to the government's tax system reform plan will approach 65 trillion won over five years. There are concerns that if the tax credit for facility investments in national strategic technologies such as semiconductors is further expanded, the additional increase in revenue loss could exacerbate fiscal burdens.

According to the '2022 Revised Tax Law Review Results and Key Contents' report recently issued by the National Assembly Budget Office on the 10th, the revenue loss from this year through 2027 is expected to reach 64.4 trillion won over five years. It is anticipated that major tax revenues will all decline, including corporate tax (-27.4 trillion won), income tax (-19.4 trillion won), securities transaction tax (-10.9 trillion won), and comprehensive real estate holding tax (-5.7 trillion won).

The stated revenue loss excludes the revenue loss (-3.65 trillion won) from the semiconductor facility investment tax credit rate increase to up to 25% this year, which was approved by the National Assembly plenary sessions on December 23 and 28 last year as part of the revised tax law review. If the semiconductor investment tax credit amendment passes the National Assembly, the total revenue loss over three years is estimated at 6.39 trillion won.

Although the revenue loss raises concerns as a negative factor for the government's sound fiscal policy stance, the government emphasized that the reduced revenue can be compensated through economic virtuous cycles. The explanation is that as companies increase investments due to expanded tax credit benefits, this leads to increases in exports, jobs, and sales, which ultimately results in higher corporate and income tax revenues.

Economic experts also support this 'trickle-down effect.' Professor Kiheung Kim, Emeritus Professor of Economics at Kyonggi University, said, "It is inevitable that tax revenues will decrease in the short term when the tax credit rate is expanded," but added, "The government judged that maintaining corporate global competitiveness through investment activation is more important than short-term revenue loss and will have a positive effect on securing tax revenues in the long term." Sung Myungjae, President of the Korean Association of Public Finance and Professor of Economics at Hongik University, also stated, "From a distribution perspective, if the competitiveness of key industries supporting our economy declines, it will eventually lead to job losses and an expansion of low-income groups. Approaching the increase in tax credit rates solely from the perspective of revenue loss is inappropriate."

Global Economic Recession Variable... Concerns Over Additional Revenue Sources

The problem is that the government's expected trickle-down effect may fall short of expectations, and the virtuous economic cycle could end as an overly optimistic forecast. This is because there are already projections of short-term investment reductions by companies due to a downturn in the semiconductor industry starting this year. The financial sector expects that Samsung Electronics' operating profit in the fourth quarter of last year (4.3 trillion won) recorded an earnings shock with a 69% decrease compared to the same period last year, making investment cuts inevitable this year. Researcher Sunwoo Kim of Meritz Securities analyzed that domestic semiconductor companies are "likely to seek justification for further investment cuts amid competitors' poor performance."

Concerns are also growing due to the absence of additional revenue source plans to prepare for the global economic recession. The government has been criticized for presenting only expenditure reduction plans without proposing measures to secure revenue following the corporate tax rate cuts. According to data submitted by the Korea Development Institute (KDI) to the office of Jang Hye-young, a member of the National Assembly's Planning and Finance Committee from the Justice Party, in October of the same year, a confidential KDI review report on the 'Evaluation of the Corporate Tax Rate System Reform Plan and Future Policy Tasks' emphasized the need to consider additional revenue sources given recent and mid-to-long-term fiscal conditions.

Issuing government bonds is also a burden. Excessive issuance of government bonds raises issuance yields, which can eventually lead to an increase in market interest rates. The government reduced the net issuance of treasury bonds to about 60 trillion won this year, 60% of the previous year, to alleviate the burden of treasury bonds. In particular, the maturity amount of treasury bonds increased due to COVID-19 responses over the past two years is 86.5 trillion won this year, a 53.9% increase compared to 56.2 trillion won last year, adding to the burden of additional issuance.

Some worry that if securing tax revenue becomes difficult, support for vulnerable groups may be reduced. Professor Sungjin Kang of Korea University’s Department of Economics said, "It is not possible to rule out the possibility that social welfare sectors will be cut when tax revenues decrease," adding, "The issue is which areas will be cut to compensate for the revenue shortfall, but even if government spending is reduced, welfare sectors should not be cut." Professor Woohyung Hong of Hansung University’s Department of Economics explained, "To secure sound fiscal health, re-evaluating economic effects through government tax expenditure performance management and preliminary feasibility studies on tax benefits, as well as managing taxes retrospectively, could be one alternative."

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