Secure additional tax sources before it’s too late

The Yoon government committed to fiscal sustainability must try harder to expand tax bases and income without compromising its restrictive policy.

Tax revenue is expected to come nearly 30 trillion won ($22.2 billion) short of projection this year, following a record shortfall of 56 trillion won last year. According to the revised estimates by the Ministry of Economy and Finance, the tax income for the full year is projected at 337.7 trillion won, 29.6 trillion won less than the targeted 367.3 trillion won.

The government has consecutively revisited softening tax projections since 2023. It explained that the dip in corporate tax income was deeper due to sluggish external trade and the chip industry. The shortfall of 14.5 trillion won in corporate tax made up half of this year’s projected deficit.

The fiscal role of defending the national economy can be shaken by less tax income. Funding relayed to local governments would have to be scaled back, as about 40 percent of the tax income goes to subsidizing them and education authorities. The government plans to dig into the reserve or defer spending on certain state projects to make up for the shortfall, but is unsure if it will work.

Policymakers can go wrong in their projections on the economy and tax income. But it’s a different matter if the margin is too big and often repeated. Tax estimation constitutes the baseline for the legislative review on budgeting and issuance of government bonds. Too big an error in the estimation can undermine the legislative authority of budgetary review.

Tax collection had been below or above expectations by more than 5 percent as many as 14 times over the past 30 years. There were seven years of shortfall under conservative governments and seven surpluses under liberal ones. A deficit stems from an overestimation of economic performance and tax revenue, whereas a surplus comes from underestimation. The Finance Ministry is suspected of leaning more on the sanguine side to back the traditional tax-cut policy under conservative governments while lowering its projections for tax income to contain fiscal expansion under liberal ones. Policymakers will argue against the assumption, but if the aberration continues, the ministry could be questioned for its accounting capability or political motives.

This year’s shortfall is attributed largely to the government’s rosy outlook on the economy. To buttress precision in tax estimates, the government must consult with private experts and disclose the model on projecting tax income. On top of poor accounting, populist prescriptions to support people’s livelihoods also reduced tax income. The cuts in fuel taxes were sustained even after oil prices improved, causing a 4.1 trillion won shortfall in transportation, energy and environment taxes. The Yoon government committed to fiscal sustainability must try harder to expand tax bases and income without compromising its restrictive policy.