The Korea Herald


[Editorial] Decline in tax revenue

Government must tighten belt, push policies to revitalize economy

By Korea Herald

Published : April 4, 2023 - 05:30

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A drop in tax revenue is inevitable when the broader economy slows down and corporations suffer operating losses. But the country's tax revenue is currently declining at a worrisome pace, prompting policymakers to discuss the need for raising taxes.

According to data from the Ministry of Economy and Finance, South Korea’s tax revenue amounted to 54.2 trillion won ($41 billion) in the first two months of this year, down 15.7 trillion won from the 69.9 trillion won recorded over the same period last year.

The year-on-year drop is attributed to the slump in the real estate and securities markets, along with the sluggish economy that is undercutting the balance sheets of major companies.

During the January-February period, transfer income taxes declined by 4.1 trillion won on-year as the number of home purchases sharply went down. Taxes from stock transactions also fell by 800 billion won as the domestic financial market experienced turbulence, forcing stock investors to reduce trades.

Value-added taxes fell by 5.9 trillion won and corporate taxes dropped by 700 billion won during the same period, reflecting the slump in the economy.

Government officials say the deeper year-on-year shortfall is a result of the delayed collection of taxes last year. The government allowed for a delay in tax payment in the second half of 2021 amid the COVID-19 pandemic. The delayed taxes were collected and reflected into the figures for the January-February period last year, leading to a higher base.

But even if the base effect is applied, tax revenue shortfall in the first two months of this year is estimated at 7 trillion won. The government aims to collect a total of 400.5 trillion won in taxes this year, and the actual tax collection by February was 13.5 percent, lower than 17.7 percent last year and the five-year average of 16.9 percent.

The continued decline in tax revenue is now becoming a hot-button issue among policymakers and economic experts. Conservative and liberal lawmakers also have different ideas about what should be done to stop the fall in tax revenue.

If left undone, the total shortfall in tax revenue would reach 40 trillion won. This negative outlook is serious enough to alarm policymakers of the Yoon Suk Yeol administration, which has pledged to cut taxes by nearly 70 trillion won this year.

The Yoon administration pushed for a cut in the corporate tax and lowered the valuation standard for comprehensive real estate tax in a bid to spark a spillover effect in the broader economy. The tax cuts and equivalent measures have been well received by corporations and owners of pricey houses.

The problem is that the tax cuts coincide with growing economic problems at home and abroad. A string of bank failures in the US and the eurozone are making investors jittery, while Korea faces more trade blocks in its exports of semiconductors and other key items with more nations opting for protectionism.

Liberal politicians argue that the administration should abandon the tax-cutting policies in order to shore up fiscal soundness and secure funds for welfare and other state projects.

Conservative pundits, in contrast, say that the government should avoid “hasty” tax hikes and instead push for more policies designed for an economic recovery. In theory, if the economy is revitalized, investment and consumption will rebound, leading to an increase in tax revenue.

Business sectors argue that the government should continue to support core sectors such as the semiconductors industry through lower taxes as rivals in the US and elsewhere are accelerating aggressive investment and setting up stringent regulatory obstacles.

Sluggish domestic consumption is also a tricky issue in connection with tax revenue. The consumer sentiment index has remained below the 100 mark for nine straight months -- indicating overall pessimism -- since May 2022. Retail sales went down in January, marking a drop for three months in a row, according to Statistics Korea.

It is not easy to decide whether taxes should be raised or not at this point, as that involves a wide range of political and economic issues. Aside from tax hikes, if the government wants to bolster dwindling tax revenue it has to take more belt-tightening measures for state projects and devise stronger policies to revitalize domestic consumption.