The tax code revision pushed this week has somewhat reflected policymakers’ efforts to maximize the effect of the government-led supplementary budget worth 11 trillion won ($9.8 billion). The taxation policy involves easing tax burdens on the corporate sector.
The easing is somewhat laudable in terms of minimizing fallout from full-fledged corporate restructuring in the ailing industrial sectors. In addition, major conglomerates are suffering a protracted export slump.
The Finance Ministry also clarified that the tax support for a variety of industrial sectors “are designed to boost investment and revitalize the entire economy.”
Under the new tax code, companies that make research and development investments in 11 selected new industries, such as smart cars, biomedical technologies and renewable energy, will be granted tax credits of up to 30 percent, up from 20 percent.
The government will also offer a 10 percent tax credit for facility investments into those areas.
The service sector, barring drinking establishments, will receive higher tax rewards in accordance with the number of employees. So far, such tax benefits had been given only to 62 percent of the service industry, with swimming pools, ski resorts, barbershops and coffeehouses to be newly added to the list.
The cultural content industry will also be aided by the expanded tax benefits, as movie and TV drama producers will get a 10 percent tax credit on production costs.
On the other hand, a worrisome point is that the government is pushing forth fiscal expansion without slashing the earlier tax benefits for the conglomerate sector via gradual hikes. As the cited code revision, the benefits -- on the contrary -- are to be extended to more industrial sectors.
There is a need to contemplate whether such a policy move is logical as the government was already operating at a deficit.
It is paradoxical that the Finance Ministry has also acknowledged that that the ratio of national debt to gross domestic product will further increase by about 2 percentage points to 40.1 percent in 2016.
The finance balance between earnings and expenditure is also projected to worsen to minus 2.3 percent later this year, from minus 2.1 percent in 2015.
This year will likely be the first time in Korea’s history that the national debt-to-GDP ratio topped 40 trillion won, and the figure is projected to surge to 41 percent in 2017.
Though the ministry has also predicted that the fiscal deficit will continue through 2019, it is just soothing the public, saying that the fiscal deficit balance will improve to negative 0.9 percent within three years.
However, the administration should be alert to the possibility that its economic policy, which seeks to boost growth with borrowed money, could eventually lead to insolvency of both the nation and households.
Indisputably, it would be difficult for the government to attain a balanced fiscal account if it refuses to raise taxes on earnings of corporations.
The nation’s business sector has recently enjoyed a falling income tax rate, which is estimated to further drop to 17.8 percent in 2019.
The most vexing possibility is that the government will seek drastic hikes of a variety of consumer taxes charged on individuals when the fiscal balance worsens in the coming years.