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Snowballing tax burden weighing on future generations

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By Yoon Ja-young

While Korean households are facing low economic growth and stagnant incomes as a new normal, their tax burden has been increasing steeply due to both extraordinary government spending on pandemic countermeasures and its overall expansion of social welfare policies. Economists warn that the tax burden will only snowball for future generations, even after the pandemic, as the country is going through an unprecedented aging of its population.

According to the Korea Economic Research Institute, a think tank under the Federation of Korean Industries, Koreans are seeing the steepest rise in their taxes among the Organization for Economic Cooperation and Development (OECD) member countries.

Total tax payments including social security contributions as a percentage of gross domestic product (GDP) recorded 27.4 percent in 2019, up 3.7 percentage points from 23.7 percent in 2015. The figure measures the overall tax burden on the people.

The 23.7 percent tax-to-GDP ratio is still low compared to the OECD average of 33.8 percent. However, Korea's 3.7 percentage points jump is the steepest among its 37 member states, according to the think tank. It is more than seven times larger than the average 0.5 percentage points rise the other OECD members saw during the five-year period.

"During the past five years, the tax and social security contribution burden has increased too steeply. The figure for Korea surpassed those of the OECD's non-European member countries for the first time in 2018," said Choo Kwang-ho, director of the Research Coordination Department at the institute.

Koreans paid an average 10.19 million won in tax and social security contributions last year, according to Rep. Choo Kyung-ho of the main opposition People Power Party. Among them, social security contributions, which include mandatory subscriptions to pension, health, employment and other social insurance plans, jumped 7.6 percent on a steep hike in national health insurance and pension premiums.

The lawmaker who previously served as vice finance minister estimated the total tax burden to rise 4.6 percent this year to 10.68 million won, and then continuing on an upward spiral to reach 12.18 million won in 2024. By sector, health insurance premiums will jump 49.6 percent from 2020 to 2024.

2021-06-09(코리아타임스)
2021-06-09(코리아타임스)

Snowballing tax burden

Despite the increasing social security contributions, its funds are drying up due to the pandemic coupled with the expansion of outgoing social welfare payments.

The employment insurance fund, which once had amassed more than 10 trillion won, is expected to face a 2.7 trillion won shortage around the end of this year in the aftermath of pandemic. The health insurance fund, which has seen a deficit for three consecutive years since 2018, is expected to dry up completely in 2026 if it continues with its current structure.

Hong Ki-yong, a professor at Incheon National University, said things will only get worse with aging of the population.

"Currently, those aged 65 or older make up over 15 percent of the population, but this will jump to over 46.5 percent in 2067. This unprecedented demographic change should be reflected in current and future fiscal policy," he said.

The change means there will be fewer young and working people to pay taxes while there will be more elderly people on whom the government must spend tax revenue. According to an estimate by the Institute of Health and Environment under Seoul National University, the number of pension recipients will start to surpass contributors to the pension fund from 2054. With the world's lowest birthrate of 0.84, Korea's population ― without counting foreign residents ― began to decline last year.

Yang Joon-mo, a professor at Yonsei University, noted in a report that this will hamper economic growth and have a severe impact on the government's tax revenue. "Each person will be shouldering more tax while the government will have to spend more on welfare," he said. Yang added that Japan fell into lost two decades as the ratio of its productive population started to decrease ― government debt piled up as it had to expand spending despite stagnant tax revenue.

He said that the current administration didn't appear to understand that there is trade-off between the tax burden and economic growth. As a result, it has failed to implement policy that can enhance the effectiveness of fiscal spending, according to Yang.

"Its outdated policy based on an income-led growth strategy slashed jobs as well as deteriorating their quality. Fiscal spending increased but failed to bring about any productive outcomes."

Overhaul expenditure

According to Chun Young-jun, a professor at Hanyang University, future generations, those born from 2019 and afterward, will have to shoulder 143 million won more in tax payments in their lifetime than before due to the expansionary policy of the current administration. He said its present fiscal policy is unsustainable due to structural problems.

"To control the risk, government spending should be overhauled to make it more cost effective. There should be a revision of fiscal policy to recover fiscal soundness," he said.

Experts note that welfare programs should be carefully designed so that they can be sustained and help boost productivity.

"Fiscal spending should lead to economic growth. If the administration only focuses on welfare, the vicious circle of low growth and snowballing government debt will continue. Japan's past 30 years is the clear evidence of this," Yang said.

He also stressed that populist subsidies need to be reformed. "The government should scrap programs that are unrelated with people's quality of life while only incurring fiscal expenditure."

Hong said the stabilization of government finances cannot be overstressed.

"Even though we are in a pandemic, government spending should be focused on boosting economic growth engines. Inefficient expenditure, such as giving everyone money from the government, will only weigh on the country."


Yoon Ja-young yjy@koreatimes.co.kr


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