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Taxing on Our WelfareAn in-depth analysis on the current Korean welfare policies and taxation policies
Choi Ka-bin  |  gabinchoi@yonsei.ac.kr
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승인 2014.11.01  16:35:19
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ON SEPTEMBER 15, the Ministry of Security of Public Administration (MOSPA) announced the “2014 local taxes amendment.” An increase in residence taxes and automobile taxes, as well as areduction in local tax exemptions were included inthis amendment. The recent policy proposal to increase taxes, in fact, was executed in response to the government’sattempt to increasewelfare expenditure. Since the government promised “welfare without increasing taxes” to the voters before the presidential election, the tax amendment is being embroiled in severe controversy and criticism. The tax policy and welfare system are intricately linked, thus, it is only natural that voices calling for radical reform of the current welfare policy are surfacing at the same time tax amendments are being proposed. Then, how are the current tax and welfare policies connected, and what direction should these policies be heading?
More about the recent tax increases
Currently in Korea, various taxes are imposed upon individual taxpayers by the government. Among those taxes, local taxes are imposed on residents to cover the municipal finance, such as residence taxes and automobile taxes. However, with the recent announcement of “2014 local taxes amendment,” there have been notable changes in the current taxation policy. First of all, residence taxes– the tax imposed on the residents living in the region – that are often autonomously imposed by local governments will be increased annually by 2016. The upper limit of current residence tax was set at ₩10,000 and as of 2013, the average amount of the tax reported from local governments was ₩4,860. However, with regards to the new proposal, the upper limit of the residence tax will be increased to ₩20,000. It is estimated that the increase in the upper limit would result in a maximum increase of five timesin the overall amount of taxesover the next two years. There would also be a two-fold increase in automobile taxes by 2017. Currently, automobile taxes, which are imposed on every car owner have remained fixed since 1999.In addition to raising automobile tax rates, the discount system offered to taxpayers for paying the total sum of theyearly automobile taxes at once, would be abolished by 2016. Whilethe amount of automobile taxcan be slightly different for each citizen depending on their car types, residence taxes are a “lump sum tax”meaning that thetax is equally imposed to taxpayers, regardless of their income or occupation. Lastly, as seen on the chart, thediscountrate forlocal taxes applied to taxpayers would gradually decline from the current level of 23% to 14.3%. These are only a few of the proposed changes.
The tobacco price increased from₩2,500 to ₩4,500 on Sep. 11. The Ministry of Health & Welfare,the government agency in charge of this price increase,strongly asserted that it was a part of the anti-smoking policy to improve national health. However, it is tempting to interpret this recent increase as another element of the nationwide tax increases. To borrow from the Korean Institute of Public Finance’s words, the total tobacco consumption of a nationdoes not alter much by the price change unless it increases enormously. The expected additional tax revenue reaches the highest level when the tobacco price is set between ₩4,000 and ₩5,000 – which is precisely the target for the revised tobacco price. This leads citizens to question the government’s argument that the price increase will encourage people to quit smoking.
When the “2014 local taxes amendment” was announced, the governmentgave two reasons for their actions. First, the government insisted that it was inevitable to carry out the tax increase under the reason of “normalization of abnormality.” Both MOSPA and Ministry of Strategy & Finance (MOSF) said that the recent adjustment of local taxes, which was originallyabnormally low, is a mere consequence of taking into account the inflation rate of 105% in the last 20 years. At the same time, the government claimed that improving the rate of financial independence of local governments, which is 44% on average and is lower compared to other OECD countries, was another purpose forthe amendment. The expansion of tax revenue is expected to contribute in solving the financial difficulties of the local governments. Even though the rationale for the tax increase provided by the government may sound reasonable, the increase will inevitably help solve the budget deficit incurred from the overwhelming welfare expenditure. Since the most significant policy promoted by the government is welfare, the underlying motives for the local taxes amendment are questionable.
 
Revealing the tax-welfare relation
It is undeniable that the government too, tried their best to search for the most effective way of operating within the limited budget. The budget proposal for this year suggests that the government is putting in efforts to accede people’s demand for wide-scale welfare. According to *Hankyoreh News*, budget for national health, employment and welfare increased from 22% in the last fiscal year to 30.7% today. Unfortunately, while government argues that this tax increase is a process of “normalizing the abnormality,” other controversies still lie beneath the “2014 local taxes amendment.” Some people criticize that the burden on ordinary people may become heavier, since both residence taxes and tobacco prices are equally imposed to every taxpayer, irrespective of one’s income level. Also, even though people have demanded for years, the tax reform does not address fundamental issues like corporate taxes, gift taxes, for instance - which have more of an impact on higher-income groups. What makes the situation worse is that the expected effect that will result from the “2014 local taxes amendment” is being questioned. To properly implement the promising welfare policies, another \690,000 million is needed. However, the estimated additional tax revenue from the local taxes amendment is only \50,000 million, another \280,000 million is expected from the tobacco price increase, both of which adds up to only a fraction of what is really necessary. Ha Neung-sik (Researcher, Korean Institute of Local Finance) said that, “It seems that the amendment would not greatly contribute to securing the finances of local governments.”
Now is the time to understand the story behind the recent tax increases. While the expected effect of“2014 local taxes amendment” is being criticized for not being able to alleviate the excessive welfare expenditure, the practicality of election pledges is also being questioned. Before the 2012 presidential election, the incumbent government led by President Park promised that they would implement“welfare policies of \13,500,000 million without tax increase during her five-year term.” Currently, in accordance to President Park’s election pledges, welfare policies like the basic old-age pension, free childcare, and free school lunch programs are being enforced throughout the country. Realistically, however, it is almost impossible to carry out these cost intensive welfare policies, without securing an increase in tax revenuefor the national budget. Kang Seong-jin (Prof., Dept. of Econ., Korea Univ.) added that, “since there were no appropriate taxation policy to secure a large enough budget for welfare, the pledge did not make sense from the beginning.”InSweden, a country which is often considered as the representative welfare state, for example, its tax burden ratio - a percentage of taxation against national income – ranges from at least 46% to a maximum of 64%. However, the case is different in our nation where tax burden ratio remains below 20%. As a result of low tax revenue while the governmentcontinuously tries to spend a large amount of money on welfare, local governments have faced financial bankruptcy. Due to this problem, the central government faces strong opposition from local governments, which have managed so far ontheir existing revenue. At a press interview held on Sep. 3, the National Association of Mayors indicated their stances on this issue and added that, “Without the central government’s financial support, welfare default is inevitable.”After years of long-lasting conflict between the central and local governments over the welfare budget, with the central government being unable to afford the demanding finances, the government had no choice but to push ahead with the “2014 local taxes amendment.”“To meet the increasing demand on welfare, the taxation policy was essential to ensure stable financial revenues,” said Oh Keon-ho (Co-operation Director, My WelfareState).
In light of the recent circumstances, with the majority viewing that excessive welfare expenditure as the fundamental reason for the revision, questions have arisen constantly whether the current welfare policies in Korean society are effective enoughand conformto social justice. At this time when “welfare” often appears as an importanttopic in elections, and when the expansion of welfare is consistently required, serious discussions are being held regarding the proper direction of the current Korean welfare policy.
 
Moving to the next step
In recent years,the word “welfare”–has become a hotly debated topic in Korean society and its social influence is increasing as days go by. There are even some occasions when the political scene undergoes a sudden change after the heated dispute over welfare. For instance, controversial free school lunch program was settled over a referendum on Aug. 24, 2011 by the Seoul Metropolitan government. Because of the turnout shortfall, Oh Se-hoon, the former mayor of Seoul who was against the free lunch program, finally had to recede from his position. As frequently observed, there is a tendency to use the Korean welfare system as a political tool to gain votes. This encourages the current Korean politicians to be merely interested in the question“what kind of welfare policywill attract voters?” with littledeliberation on “how to realize a welfare system that achieves social justice.”Welfare without social and economic foundation is nothing more than populism, which means that it only appeals to superficial public interests rather than enhancing the quality fororiginal purposes – practicality, value judgment, etc. In this context, welfare policies should be carefully examined from long-term perspectives and policy makers should focus on establishing social foundations which make the sustainable welfare available. Unconditionally pursuing the policies like half-price tuition fee without a well-founded social infrastructure is a typical example of the short-term objectives to attract as many votes as possible, and just as expected, the government is showing an ambiguous attitude on this policy as time passes by.Putting an emphasis on the need for a long-term examination does not mean blatantly criticizing the recent Korean welfare policies that tends to universally address every citizen. Universal welfare is practical only when there is enough preparation to secure a huge budget to implement it. Unfortunately, this is not achievable in most realistic societies including that of Korea andin this case, a narrower form of welfare has to beestablished.
Considering the current situation and surrounding circumstances, as for now, pursuing “selective welfare” rather than “universal welfare” seems more practical. The main difference between universal welfare and selective welfare lies in the scope of the beneficiaries. While selective welfare serves to only provide for those who are most in need, universal welfare is a concept to provide identical welfare services to the entire nation. Before proceeding any further, let us address the meaning of the word “welfare.” According to the Oxford English Dictionary, welfare is the provision of a minimal level of well-being and social support for all citizens and it is largely provided by the government. Accordingly, all citizensshould be guaranteed a way to live a life worthy of human beings and should not fundamentally be deprived of opportunities for class-rising with help of welfare policies. Thus, offering identical welfare services to the all the people in the country does not satisfy the criteria, since welfare should be a system that enables every social member to beginfrom similar starting lines. Hence, by preferentially offering welfare services to people most in need, the gap between the haves and the have-nots can be narrowed.
Upon closer examination, a universal welfare is in fact, more inefficient than selective welfare in Korea. This is because universal welfare requires an excessively wide scope of beneficiaries, in other words, welfare services can be offered to those who are not desperate for it. If the budget is spent on unnecessary areas like this, budget for other necessary areas are likely to be reduced and this can impede the overall efficiency by generating “welfare blind spots.”For instance, the data provided by Geonggi Provincial Office of Education shows that the budget for 2010 free school lunch program (\19,130 million) drastically increased compared to that of last year (\7,510 million). However, this led to huge cuts or“blind spots”in other areas like foreign language education (₩7,840 millionto₩4,720 million), and study support for children from multicultural families.
Furthermore, according to MK Business News, selective welfare is highly more effective in income redistribution than universal welfare, and thusmore useful in relieving social discrimination. Woo Jin-seong, a researcher at Korea Economic Research Institute, revealed that the actual beneficiary of universal welfare– free lunch school program, free childcare, half-price tuition policy, for instance - is not the low-income group who actually needs the benefits, but the middle classes, since today’s parents tend to raise children if and only when certain amount of income is guaranteed unlike the past. Thus, with the completely identical welfare benefits, low-income group who are most in need may not actually benefit from it. Also since the entire budget for universal welfare is usually funded from people’s taxes, the tax burden can be excessive. In the end, this can aggravate the income distribution while blocking the probability of narrowing the gap between the rich and the poor. The results of a recent survey conducted on4,185 adult males and femalesby Korea Institute for Health and Social Affairs (KIHASA),also show that the number of people supporting selective welfare (43.7%) was higher than that of universal welfare (36.7%).
To properly operate the purposed policies, a fundamental reform of the taxation system is also necessary, since tax is the specific measure for realizing welfare policies. Seong Tae-yoon (Prof., Dept. of Econ. Yonsei Univ.)said that, “For sources of tax revenue, adjusting local taxes is not enough. In the end, revision of the tax system as a whole must take place.”Moreover, it is important to remember that the biggest role of national taxation system should be the redistribution of income and wealth. In the aforementioned survey conducted by KIHASA, 85.8% of respondents agreed that tax level imposed on the wealthy is still lower than what is deemed necessary. In regards to this, the matter of raising taxes on the wealthy which people have demanded for years has to be discussed at the national level. In the KIHASA survey, the greatest proportion of people (43.4%) replied that “imposing more taxes on the higher-income group” is the most appropriate way of securing welfare budget. Lastly, the government should try their best to materialize the policies they promised. By doing so, they can secure the faith in the government among people, therefore bringing a step closer to promising future.
 
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For whom are ourtax intended? For whom is our welfare intended? No one can answer these questions without understating the connection between the two. Indeed, the Korean society is experiencing thepains of becoming more mature, along with the changes in tax and welfare system. Instead of superficial approaches, now it is time to sincerely consider theessence of the problemand the very last goal to pursue. Likewise, at this present time, unrealistic pledges that promise “welfare without tax increase” should be properly revised. Further, for a more appropriate level of welfare and taxation, the government should revealtheir intended policies transparently, while acknowledging mistakes and providing understandable excuses for any policy changes. Only then will the future of our welfare look brighter.
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