[Public Voices] The Tax State and the Sustainability of Public Finance

People inevitably live together, and money is needed to maintain that framework. Historically, how has the cost and finance of maintaining communities been secured? In ancient times, rulers monopolized sources of wealth but bore the financial burden themselves. During the feudal era, lords owned land and provided tenants living within their domains with tenancy and security. The community’s livelihood was collectively managed from the lord’s pocket. When the manorial system collapsed and the era of absolute monarchy arrived, it became difficult to sustain the country’s finances solely with the king’s wealth. Although enjoying many privileges, including trade monopolies, the absolute monarchy could not raise the enormous funds needed to maintain the bureaucracy and standing army, which were the core of absolute power. From then on, taxes became the main means of funding the state’s finances. This marked the birth of the so-called tax state (Steuerstaat). While taxes initially improved state finances, excessive tax collection eventually triggered revolutions.

Today, we live in a country where citizens create the constitution and govern according to the law. Those responsible for managing the country’s finances are directly elected by the people. This is the so-called democratic constitutional state. Naturally, the finances needed for running the country must also be raised by the people. This is why the constitution states, “All citizens shall have the duty to pay taxes as prescribed by law.” Here, I would like to introduce a passage from a letter Benjamin Franklin sent to a friend: “Our new constitution is established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” The latter part is widely used to mean that death and taxes are unavoidable in human life. It is true. However, considering the context, what Benjamin, who was 82 and two years from death, wanted to say was that even the fundamental governance system established by the constitution can change at any time?except for the citizens’ duty to pay taxes! According to his prophecy, we will live forever in a tax state.

But can a nation’s finances really be covered by taxes alone? When taxes fall short, borrowing is used. In crisis situations like the COVID-19 pandemic, all countries injected massive funds to stabilize the economy and protect their citizens. Responding to urgent social welfare demands often results in fiscal deficits. This is called national debt (D1) in a narrow sense, which amounted to 1,126.7 trillion won based on the 2023 national settlement. Adding debts owed by public institutions results in general government debt (D2: 1,157.2 trillion won as of the end of 2022), and including debts of public enterprises leads to public sector debt (D3: 1,588.7 trillion won as of the end of 2022). Finally, including contingent liabilities with uncertain payment timing or amounts results in the liabilities shown on the financial statements, which stood at 2,439.3 trillion won at the end of last year.

In reality, no country operates its finances without debt, so some prefer to call it a debtor state (Schuldnerstaat) rather than a tax state. What matters is not the name but the sustainability of finances. If our citizens have sufficient ability to repay debts through taxes in the future, managing debt at an appropriate level is acceptable. This can be gauged by the debt-to-GDP ratio, which for Korea was 53.5% (based on D2) in 2022. According to reports by the International Monetary Fund (IMF), most European Union countries exceed 80%, and the United States and Japan reach 121% and 260%, respectively. While this might make Korea seem like a top student, unfortunately, Korea is not a country with a reserve currency. If fiscal deficits increase government bond issuance, there is a high risk of rising interest rates and currency depreciation. This is why strict debt management is necessary. The average for non-reserve currency countries among OECD members is 53.1%, so Korea is currently right in the middle. The problem lies in the future. In the worst-case scenario of accelerated aging, low birth rates, and stagnant growth, it will be difficult to guarantee fiscal sustainability. It is time to carefully review not only the annual results of the country’s finances but also future prospects and firmly hold the reins.

The government approves the national settlement report in April and submits it to the Board of Audit and Inspection. Around this time, sensational news such as “national debt hits record high” and “surpasses thousands of trillions” briefly floods the media. I hope that the public will continue to understand the true meaning of these figures and wisely choose reforms for future generations.

Yoon Jaewon, Professor, College of Business, Hongik University

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