[Insight & Opinion] The Future is Revealed Through the Tax System

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The government's tax revenue shortfall issue is becoming serious. Amidst severe economic problems such as trade balance deficits and sluggish growth forecasts, another concern has emerged. These issues are truly rare occurrences. In the case of the trade balance deficit, it is the first time in 24 years, except for instances during the global financial crisis, that such a deficit has been experienced. The greatest concern lies in the lack of proper diagnosis and solutions to address these problems.

More than a decade ago, a similar situation arose. Corporate taxes and real estate-related taxes were reduced, and naturally, the issue of tax revenue shortfall became a hot topic. The bigger problem was in the countermeasures: from 2011 to 2016, the government consistently maintained low property tax rates while increasing income tax rates and reducing various income deduction benefits, thereby raising the overall income tax burden.

At that time, in the United States, Warren Buffett criticized that his employees faced too high income tax rates while super-rich individuals like himself had too low rates, arguing that tax rates for those earning over $1 million (approximately 1.3 billion KRW) should be significantly increased. Buffett's intent was greatly distorted upon entering Korea. The Korean government and National Assembly used the term "Buffett Tax" in amending the income tax law, but paradoxically increased the burden on workers earning around 100 million KRW annually, similar to Buffett's employees. As a result, taxes on those already owning multi-billion KRW homes or multi-hundred-billion KRW buildings were significantly reduced, but the dreams of those striving to increase their income and eventually purchase such homes or buildings were inevitably crushed.

From the perspective of economists who emphasize effective demand (money connected to consumption), tax policies that reduce property taxes while increasing middle-class income taxes negatively impact the national economy. For example, reducing the tax of a homeowner with a property worth over 3 billion KRW by 10 million KRW is less likely to stimulate consumption than reducing the tax of a worker earning 100 million KRW from 40 million KRW to 30 million KRW, which is more likely to translate into consumption. Income tax reductions for workers directly increase their income, which immediately leads to consumption and thus enhances the multiplier effect (where one person's consumption becomes another's income, circulating money). During the period when income tax burdens were increased, Korea's domestic demand shortage became a chronic problem, and government spending on economic stimulus only grew.

There is a fear that the government might again resort to expanding income taxes due to the tax revenue shortfall. Increasing income taxes will lead to reduced income, decreased consumption, and ultimately a decline in future tax revenues. Instead, I advocate actively expanding income tax deduction systems to alleviate pressing social issues such as polarization and low birth rates.

This would involve significantly expanding income tax deductions for amounts spent purchasing domestic rice or small and medium enterprise products in traditional markets, donations to marginalized groups, lodging and meals in domestic local travel destinations, and consumption of birth and childcare products. The taxes reduced in these areas will ultimately contribute to the national budget through a virtuous cycle effect.

If the tax revenue shortfall must be compensated from somewhere, raising the land holding tax, which Milton Friedman, a leading figure of free-market economics, argued as one of the least harmful taxes, is the way forward. The great economists Keynes and Buffett would also actively agree.

Seo Junsik, Professor of Economics, Soongsil University

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