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[Editorial]Reasons to Oppose Lowering Taxes

Posted August. 27, 2001 09:01,   


It is rare to find anyone who will protest the government lowering taxes. When it comes to taxes, people largely support governmental policy to lower taxes since it increases their income earnings. However, the effectiveness of the policy varies in large degree according to the motivations behind lowering taxes and the appropriateness of the timing. The world history of taxes has shown that it can actually be poisonous rather than healing to lower taxes depending on the time and place.

Hence, our attention inevitably focused on the Korean Tax Research Institute, a national policy think tank, who raised objections to the administration`s plans to implement a tax benefit for wage earners and independent business owners which will reduce their tax burden around 10 – 15 percent.

The administration claims that the tax reduction policy aims to rescue the domestic economy from the current economic hardship by increasing consumption, a cornerstone of the economy. As a measure specifically targeting wage earners who have stable income flow and independent business owners whose earnings have recently become visible through credit card use, the policy appears quite suitable on the outside.

However, the Tax Research Institute indicates that permanently lowering taxes after the foreign exchange crisis, when finances are running a deficit and the government debt is increasing, runs a high risk of making matters worse. The Institute argues that the first priority of the administration should be reducing government spending rather than lowering taxes - a persuasive argument.

When one considers the government debt running over 100 billion won and the enormous amount of public funds invested in financial structural reform, the prospects for worsening of the economy appears as clear as day. The administration promised a balanced finance by the year 2003 but it remains a question whether lower taxes could decrease the flow of new income and cause more difficulties for the recovering economy. One worries whether Korea will follow Japan`s fall into a long recession after piling up high financial deficits.

The fact, too, that the administration picked the time just before next year`s presidential elections makes it hard to trust its motivations. Of course, it is understandable that the administration spent a lot of time in making amendments and passing new laws. Yet, how will it explain the fact that a restored economy promised for this year and the benefits from tax reduction do not coincide? Once you lower taxes, it is extremely difficult to raise them again. The administration should propose a tax policy after seriously considering the Tax Research Institute`s warning.