[Q&A] Hong Nam-gi: "1.5 Trillion Won Tax Revenue Decrease Effect Is Not Large"

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[Asia Economy Reporter Jang Sehee] Hong Nam-ki, Deputy Prime Minister for Economy and Minister of Strategy and Finance, stated, "Although there is a tax revenue reduction of 1.5 trillion won due to this year's tax reform, it is not a very large amount when looking at the overall national tax revenue." This was in response to criticism that the tax revenue decline is significant amid increased spending due to expansionary fiscal policy.

At a pre-briefing on the '2021 Tax Law Amendment' held at the Government Seoul Office on the 23rd, Deputy Prime Minister Hong said, "Depending on the contents of the tax reform, there are cases where tax revenue decreases occur and cases where tax revenue increases occur." He explained that since 1.5 trillion won accounts for only 0.48% of the total national tax revenue (314.3 trillion won), it is not considered a large amount.

He added, "Tax credits for research and development (R&D) and facility investments in national strategic technologies account for about half of the significant portion," and emphasized, "The rest largely consists of support for low-income earners, such as raising the income threshold for the Earned Income Tax Credit (EITC)."

The following is a Q&A with Deputy Prime Minister Hong.

▲ What are your thoughts on the necessity of tax increases?

=There must first be a national consensus on the purpose, scale, target, method, and necessity of tax increases. To discuss major tax increases or cuts beyond minor adjustments in tax reform, social consensus is a prerequisite. The government will primarily strengthen taxation on undeclared income and work on reorganizing unnecessary tax exemptions and deductions. Through this, efforts are being made to expand a solid tax revenue base.

▲ The inheritance tax payment-in-kind system for artworks was excluded after party-government consultations.

=There have been various social discussions about allowing payment-in-kind with artworks. While there is agreement on the purpose of permitting payment-in-kind to manage and preserve artworks and cultural assets of high historical and artistic value at the national level, many opinions called for more in-depth discussions. Therefore, this tax reform proposal does not include it for now, and it will be discussed together when the tax law amendment bill is submitted to the National Assembly. If necessary, it is expected that the bill will be proposed by lawmakers rather than the government and discussed jointly.

The following is a Q&A with Kim Tae-ju, Director of the Tax Policy Bureau.

▲ The reduction in tax burden for large corporations is 2.8 times greater than that for small and medium-sized enterprises (SMEs).

=Excluding the tax support part for national strategic technologies from this year's tax reform tax revenue effect, large corporations see an increase of 16.1 billion won, while SMEs experience a decrease of 31.6 billion won. Without the national strategic technologies, the tax burden for SMEs decreases, and for large corporations, it increases, but not at a significant level. Considering this, it can be seen as a tax-neutral situation.

▲ You mentioned reorganizing the entire tax exemption and deduction system, but most are expansions of exemption targets or new exemptions.

=Among the 86 items scheduled to sunset this year, 19 items were terminated or reduced. The rate of tax exemption and deduction reorganization is about 22%, similar to previous years. It was 15% in 2018, 24% in 2019, and 20% in 2020.

▲ What is the scale of the tax revenue effect from the extended sunset provisions?

=The tax revenue effect from the extended sunset provisions is estimated to be about 6 trillion won. Most of the extended items are support systems for vulnerable groups such as low- and middle-income earners and SMEs. Approximately 83% of the extended sunset items benefit vulnerable groups.

▲ What is the government's position on the imposition method of the comprehensive real estate holding tax on the top 2%?

=The current deduction amount of 900 million won was set in 2009. Since then, it has not reflected the rise in real estate prices and inflation, causing a significant increase in the number of comprehensive real estate tax payers. The bill was proposed to address this issue. The government agrees with the bill. The comprehensive real estate tax bill is expected to be discussed at the August extraordinary session of the National Assembly.

▲ What is the expected annual issuance scale of government bonds for individual investors?

=The issuance scale has not yet been finalized. After approval by the National Assembly, it will be decided later considering the overall government bond market situation and demand. Also, the design excludes those subject to comprehensive taxation on financial income from the special application target.

▲ How was the tax revenue effect of national strategic technologies estimated?

=It was calculated comprehensively considering the outlook for R&D and facility investments in fields such as semiconductors, batteries, and vaccines, as well as the proportion of technology amounts eligible for tax support.

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