Prerequisites for tax cuts

Deputy Prime Minister and Finance and Economy Minister Jin Nyum announced that the government would lower direct taxes on income, corporate and transfer income among others on a medium- and long-term basis. He said the policy was aimed at relieving the financial burden on taxpayers.

In light of current global taxation trends, the tax-cut policies being adopted by the United States and European nations are certain to have an impact on Korea. For this reason, the government should lower tax rates to cope with the expected external influence. The tax reduction measure will be effective in perking up the economy in the long term, although its immediate effect will likely be negligible. The measure is expected to have few adverse effects compared with other short-term economic stimulation steps. Moreover, since greater amounts of taxable income are being exposed with the growth of credit card use and exact income amounts are being brought to light with the advent of new tax assessment standards, tax revenues are rising.

However, the government should be reminded that if it lowers taxes, it may find it difficult to raise them again in the face of resistance from taxpayers. If the government ventures to lower the people`s tax burden to curry favor with voters ahead of elections in the next two years, the general public will be obliged to shoulder a heavy financial burden in the aftermath. As a means of addressing possible public misunderstandings, the government is urged to come up with clear-cut guidelines on the timing of tax cuts, the kinds of taxes involved and reduction rates. The government pointed out that it could afford to carry out tax cuts thanks to increased tax revenues stemming from administrative reforms. Nevertheless, the government should bear in mind that increased tax incomes mainly owe to hikes in corporate taxes and stock transaction taxes arising from last year`s business boom. Hence, it is desirable that the government give tax breaks to wage earners rather than corporate taxpayers, on the grounds that the workers have so far received few benefits from tax reform measures.

Most importantly, the government ought to give top priority to state finances. From a long-range viewpoint, it goes without saying that tax reform is built on supply and demand and the maintenance of stable financing. Of course, swelling government debts should be taken into consideration, but state finances must not be jeopardized at a time when the tax base has yet to be broadened. Although the lower tax policy has not yet been finalized, tax authorities need to carefully approach this question so as to avoid either imposing a heavy financial burden on the people or attempting to please them.