SEOUL– South Korea’s plan to cut taxes is aimed at supporting private sector-led economic growth, but could conflict with the government’s avowed goal of improving its fiscal health.
The tax cuts are mostly made up of corporate and property tax reductions, and are expected to stir controversy over the policy effect as some critics worry that they would benefit only the rich and conglomerates.
The Yoon Suk-yeol administration on Thursday announced its new economic policy plan, which centers on deregulation and tax cuts in an effort to encourage more companies to increase investment and create jobs.
The plan comes in contrast with the government of liberal former President Moon Jae-in, which focused on state-led economic growth through massive fiscal spending, and raised corporate and real estate taxes to promote fair taxation.
The key element of the tax cut plan is to lower the maximum rate of the corporate tax to 22 percent from the current 25 percent, a move that requires parliamentary approval.
Business lobby groups have called on the government to reduce corporate taxes, saying that Korean firms are shouldering heavier tax burdens than their rivals in other major countries.
As of 2021, the average maximum corporate tax rate stood at 21.5 percent among 38 member countries of the Organization for Economic Cooperation and Development (OECD). The corresponding rate of the Group of Seven (G-7) advanced nations reached 20.9 percent.
The government also plans to ease the burden of paying property-related taxes, especially for owners of a single home. It also aims to abolish capital gain taxes over sales of listed Seoul stocks, except in case of major shareholders, and lower the stock transaction tax.
The push for those tax cuts, however, runs counter to the government’s stated goal of improving fiscal soundness in the face of its mounting national debt.
President Yoon vowed efforts to strengthen fiscal health, as the national debt grew at a faster pace under the Moon government due to its expansionary fiscal policy aimed at tackling the COVID-19 pandemic.
The national debt is expected to exceed the 1,000 trillion-won (US$778 billion) mark for the first time this year. The sovereign debt will likely amount to 1,068.8 trillion won and the debt-to-GDP ratio is forecast to hit 49.7 percent, according to the ministry’s latest estimate.
South Korea also faces growing pressure on public finances as its chronically low birthrate and rapid aging population will jack up welfare costs over the long term.
The country drew up a record extra budget of 62 trillion won last month to support pandemic-hit merchants. The budget will be mainly financed with the estimated 53.3 trillion-won excess tax revenue for this year.
If passed, the tax cuts would result in a fall in tax revenue. The government earlier forecast tax revenue to reach 396.6 trillion won this year, and the collection of corporate taxes will likely amount to 104.1 trillion won.
The government said if tax cuts help companies expand investment and create jobs, tax revenue could climb if the privat-sector led economic growth materializes.
“The government is pushing for tax reduction in a way that does not undermine fiscal health, and will also make efforts to curtail expenditures,” First Vice Finance Minister Bang Ki-sun told a press briefing Monday.
Some experts voiced concerns that the new economic policy plan lacks measures to narrow income inequality and ease the economic pinch facing ordinary people.
The South Korean economy faces a growing risk of stagflation, a mix of slowing growth and high inflation, due to heightened external uncertainty.
Against this backdrop, the ministry lowered its 2022 economic growth outlook to 2.6 percent from its December estimate of 3.1 percent, while sharply raising this year’s inflation outlook to a 14-year high of 4.7 percent from 2.2 percent.
Woo Seok-jin, an economics professor at Myongji University, said the government needs to increase fiscal spending to support ordinary people and small firms struggling with high inflation.
“I believe the government could lower corporate taxes to meet global standards. But I don’t think this is the right time,” he said.
Source: Yonhap News Agency