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Republic of Korea: Tax Revision Seeks Better Fiscal Balance
Source: koreaherald.com
Source Date: Monday, August 23, 2010
Focus: Knowledge Management in Government
Country: Korea (Republic of)
Created: Aug 30, 2010

The 2010 tax revision plan released Monday signals a major shift in the Lee Myung-bak administration’s policies of lower taxes in the wake of the financial crisis.

The bill aims to generate 1.9 trillion won ($1.6 billion) of extra tax revenue for the next five years, mainly from corporate tax and individual consumption tax. The Finance Ministry put forward “better fiscal situation” into one of its four principles of the revision, prioritizing sound balance sheet of government after offering years of stimulus packages and tax cuts to boost private spending and corporate investment.

The bill said tax deductions for companies making investment would be lifted and reduced according to different categories, but said more tax incentives will be given to companies creating jobs.

New source of tax revenue includes VAT from aesthetic plastic surgeries, veterinary treatment and private educational institutions for adults.

The idea of solidifying the public balance sheet through tax increases, however, clashes with free-market economists and companies stripped from investment tax deductions.

“There sure is a need to strengthen the public fiscal situation given massive debt held by the government. But they should try to do so by controlling their expenses,” Kim Pil-hyun, a research fellow at the Korea Economic Research Institute.

Kim states that the country’s public spending multiplier, a widely used measure to assess efficiency of public expenses, remains far below 1 at 0.838, meaning the government creates less than $1 of output per dollar spent.

“Korea’s GDP output may decrease if the government is to cut tax benefits and collect more taxes,” Kim added.

Strategy and Finance Minister Yoon Jeung-hyun speaks about tax revision plans during a meeting with Grand National Party leaders on Monday. Yonhap News

Kim acknowledged that the policy change may be in line with the international movement to tighten fiscal policies to prop up the public finance crumbled from giving out stimulus packages during 2008-09 financial crisis.

The G20 leaders agreed on the need to gradually improve financial soundness during the Toronto Summit in June, as sovereign default risk came up as a major threat in the recovery phase of the world economy after Greece’s debt problems were highlighted.

“But in Korea’s case, getting a better grip of government’s spending would achieve much better results without investment losses,” Kim said.

The Lee administration has been maintaining tax-cut policies for the past two years.

Tax cuts were ranging from reduction if income and corporate taxes to lowering of inheritance tax, and easing of the requirement for capital gains tax.

The Finance Ministry then said that “heavy tax burdens in the previous (Roh Moo-hyun) administration have hurt economic activity in the private sector,” and that the nation needs more support.

In the 2010 tax revision plan, a combination of tax increase and selective support for the job creators and the low-income class is being understood as the government’s choice to deal with a multitude of problems.

“A continued tax support for the low-income class does burden the economy and we have to prepare for increased welfare spending with the coming of low-birthrate, fast ageing society,” Finance Minister Yim Jong-ryong told reporters.

Additional tax deductions for families with more than two children will be available. Investments in welfare facilities including at-work childcare facilities will be strengthened and tax deduction rate for such use will be increased from seven percent to 10 percent.

The 2010 revision includes measures to encourage honest reporting of income to improve fiscal situations. Taxpayers are obliged to issue receipts for cash payment and those who earn more than 0.5 billion won a year are required to prove the reliability of their bookkeeping with a tax accountant when reporting their income.
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