SEOUL, March 9 (Yonhap) — Raising taxation may not sound plausible for now as households and companies are still struggling to bear the brunt of the COVID-19 pandemic, but talks of tax hikes are set to simmer in South Korea to help repair the state coffers amid growing national debt.
The government has not broached the issue overtly given its far-reaching impact and public backlash in time of the economic slumps caused by the new coronavirus outbreak.
But some ruling party lawmakers began to float the idea of hiking taxes as without tax increases, state coffers are widely expected to run dry at a faster rate in order to finance a series of pandemic relief funds and stimulus measures.
The liberal Moon Jae-in administration has already revised the tax code in a way that imposes higher taxes on the rich and bigger firms in a bid to address social inequality and increased social welfare costs amid rapid aging and record low birthrates.
Recently, the country’s financial status is on a course to worsen in the face of the pandemic, which prompted some politicians to take a look at additional tax hikes.
Rep. Lee Sang-min of the ruling Democratic Party (DP) said he will propose a bill designed to raise income and corporate taxes on the wealthy and larger businesses between 2022 and 2024.
Another lawmaker of the same party, Lee Won-wook, suggested raising value-added taxes for three years to finance an envisioned state scheme to compensate merchants’ losses over the pandemic.
Gyeonggi Province Gov. Lee Jae-myung, one of the presidential hopefuls, also joined the move to support his idea of adopting a basic income-based welfare program.
“Time appears to be ripe for fiscal authorities to start to put the issue of tax hikes to public debate,” Rep. Yoon Hu-duk, head of the parliamentary finance committee, said at a panel meeting last month.
South Korea has relatively sufficient room for more expansionary fiscal measures, compared with other major countries, but the growing pace of its debt looks worrisome.
The country proposed an extra budget of 15 trillion won (US$13.3 billion) last week to finance the 19.5 trillion-won aid package aimed at supporting smaller merchants and vulnerable groups hit hard by the pandemic.
Last year, the government drew up extra budgets totaling 67 trillion won four times to tackle the economic fallout of the pandemic. Nearly half of the budgets were spent on financing three rounds of pandemic relief funds totaling 31.4 trillion won.
The country drew up a record 558 trillion-won national budget for this year, up from 512.3 trillion won last year.
With the latest extra budget, the country’s debt is expected to reach 965.9 trillion won this year. Its debt-to-gross domestic product (GDP) ratio will likely reach 48.2 percent in 2020, higher than just below 40 percent before the pandemic.
The finance ministry forecast the national debt will increase some 125 trillion won to 1,091 trillion won next year. If more extra budgets are created this year, the debt may top the 1,000 trillion-won mark this year.
In comparison, the country saw tax revenue decline 7.9 trillion won last year as the collection of corporate taxes fell amid the pandemic.
The country’s tax-to-GDP ratio, a measure of a country’s tax revenue against its economic size, tentatively reached 27.4 percent in 2019, lower than an average 33.8 percent of member countries of the Organization for Economic Cooperation and Development (OECD), according to an OECD report.
Major economies are moving to raise taxes in an effort to address a severe hit in their public finances caused by the pandemic.
Last week, Britain announced a plan to raise corporate taxes for larger businesses in 2023 in its first such tax hike since 1974.
U.S. Democratic Sen. Elizabeth Warren proposed the “Ultra-Millionaire Tax Act,” which would levy a tax on the net worth of households and trusts over $50 million.
The Korean government remains cautious about joining other nations in hiking taxes.
“It is necessary to hold a public debate and build a consensus (if the country seeks to increase taxes),” Finance Minister Hong Nam-ki said at a press briefing on March 2.
The minister said the country needs to comprehensively take into account the scope of social welfare programs and public tax burdens before deciding on tax hikes.
Experts remained divided over the scope of tax hikes, but they agreed that the country should consider tax increases in the long term, given growing fiscal pressures from rapid aging.
“It would be better to raise taxes in an across-the-board manner, if the country seeks to adopt a basic income scheme or expand universal welfare programs,” said Kim Jin-bang, an economics professor at Inha University.
“But if resolving income disparity is a pressing issue, it would be natural to let the wealthy shoulder more of the burden,” he added.
The talks of tax hikes came in chime with improving economic conditions.
The South Korean economy is on a mild recovery track on the back of robust exports after it suffered the first contraction in more than two decades last year.
The Bank of Korea (BOK) forecast Asia’s fourth-largest economy will grow 3 percent this year, following a 1 percent retreat last year.