A tax war in wait

Due to a lack of legal grounds, populist tax spending cannot be stopped.

Chang Duk-jinThe author is a professor of sociology at Seoul National University. Rationalizing taxation should make one of the top agendas for the Yoon Suk Yeol administration in its remaining term. Put simply, Korea’s tax code is in shatters. Due to a lack of basic consensus on why taxes are needed in a democratic republic, governments in the past only resorted to a quick fix for fear of stoking backlash. The previous Moon Jae-in administration made it worse by weaponizing tax to force lofty liberal ideals onto the general public. The conservative government under President Yoon has been making a series of cuts in taxes on comprehensive property ownership, corporate income, financial investment income, and capital gains from stock transfers. Although the move is better than the ideology-driven tax policy of the previous government, it loses justification due to ambiguous principles and lack of consensus. It invites criticism for being a populist policy from the opposition — and criticism for being a tax cut for the rich from even the conservative media.

Taxes are expected to be a central theme in the next presidential election in 2027. Depopulation takes the first toll on money and power — in other words, tax and security. The dearth of birth means fewer men for conscription. Those who used to be exempted from military draft, including women, may have to serve military time. The conscription period may have to lengthened, or voluntary or hired servicemen would have to be adopted. Nobody will like the idea, but it cannot be avoided. Taxes are the same.

The fastest ageing society in the world means that the taxpaying population is shrinking at the fastest pace in the world. At the same time, the elderly share needing tax-financed social benefits is rapidly growing. Increased welfare costs will be billed on the people in their 20s and 30s when they reach their 40s and 50s. The question is, will they be willing to pay?

The Yoon administration is keeping mum when the opponents criticize its tax policy for serving the interests of large companies and the rich class only. According to 2023 tax accounts of member countries compiled by the Organization for Economic Cooperation and Development (OECD), the share of corporate tax in Korea’s all tax income was 30 percent higher than the OECD average. Contribution from inheritance tax nearly tripled at 250 percent. Korea’s maximum income tax rate is 49.5 percent, the highest among OECD members and much more than the 37 percent of the United States. In other words, rich Korean companies and individuals are paying much above the OECD average in taxes. On the other hand, those who do not pay any taxes among salaried workers make up a whopping 37 percent of the people subject to taxes, nearly tripling the OECD average.

Tax cuts for the rich nevertheless draw emotional scorns. Polls show the majority of taxpayers are disgruntled about rich companies and individuals not paying their fair share in taxes. The lower the income, the bigger their grudge against the rich. Those who are not paying taxes are criticizing those making big contributions. Nevertheless, President Yoon who frequently lectures on free democracy or his protégé Han Dong-hoon — the interim leader of the People Power Party (PPP) who addresses the people as “fellow citizens” — does not bother to clearly explain what meaning taxes have in a democratic republic. Before the tax cut, leaders should be able to clearly define taxes and who are liable to how much. Only when the definition is clear-cut can policymakers and politicians honestly speak of a universal tax hike.

The next presidential candidate of the Democratic Party (DP) will certainly pitch tax populism. The liberal opposition, which attacks the government’s tax cuts as a populist move, will target wealthy companies and people with heavier taxes to indulge the popular masses. The leftist populism is ripping off the rich. If DP leader Lee Jae-myung becomes the liberal party’s presidential candidate again in three years — or if someone else does — they will repeat the same mantra as during the last presidential election: universal basic income.

The DP, which lambasted the government’s tax cuts as a populist move, unveiled its measures on the same day to solve our ultralow birth rate. It proposes a 10-year loan of 100 million won ($75,000) for all newly-weds, which would become interest free if they have a first child, 50 million won written off if they have a second child, and the entire 100 million won canceled if they have a third child. It also offers to hand out 100 million won worth of allowances and funds for every child born. It does not say where the money comes from.

The 21st National Assembly where the DP makes up more than the majority has yet to pass a bill on a fiscal rule that limits government spending beyond a certain threshold. Among OECD countries, only Korea and Turkey do not have binding fiscal rule. Due to a lack of legal grounds, populist tax spending cannot be stopped.

The Yoon government must clearly define what tax means in a democratic republic and specify who is liable to what, based on the definition to institutionalize a normal pathway in tax policy. A tax cut or hike based on clear grounds can gain validity. Without setting the grounds, we cannot avoid a tax war regardless of multiple cuts — and going down the doom’s way.

Translation by the Korea JoongAng Daily staff.