EDITORIAL from the Korea Herald on July 6)

Tax-cut dilemma

Under the revised tax code, the government cut individual and corporate income
taxes on Jan. 1 this year. Additional tax cuts are due next year. The idea behind
the tax cuts is that they will boost business activity, generate growth and
eventually increase tax revenues.

That should be a long-term goal of President Lee Myung-bak's pro-business
economic policy. In the short term, however, the tax cuts are creating a fiscal
deficit. Worse still, the current economic crisis is threatening to make the
prospective deficits unbearably large.
Nonetheless, the widening gap between tax revenues and fiscal spending has been
of little concern to the Lee administration in the past. Instead, it has been
pursuing a debt-financed recovery from the economic crisis - a policy of cutting
taxes and sustaining deficits. By doing so, it has been encouraging corporations
to boost investment, create jobs and help arrest any further slide into
recession.
But the rationale is being called into question as the economy is now showing
signs of bottoming out. Is it still necessary to sacrifice fiscal prudence and
incur huge deficits in the years ahead - 51 trillion won this year, 10.7 trillion
won in 2010 and 12.5 trillion won in 2011?
Many voice opposition to this policy with good reason. National debt is projected
to grow from 35.6 percent of gross domestic product this year - or 366 trillion
won - to 51.8 percent of GDP in 2014, the year when the Organization for Economic
Cooperation and Development expects fiscal balance to be restored.
A lawmaker of the ruling Grand National Party framed a question about the tax
policy from the viewpoint of fiscal prudence when he asked last week if the
government would go ahead with the second phase of individual and corporate
income tax cuts scheduled for next year. In reply, Finance Minister Yoon
Jeung-hyun said, "The question merits serious consideration."
Then the minister had his remark toned down in an apparent attempt not to give
the impression that he was abandoning the second-phase tax cuts when no policy
coordination had been made on the issue. His ministry came up with a lame
explanation in an official statement: "The basic tenet of the tax-cut policy will
remain intact."
But it may not be easy to maintain the "basic tenet," no matter what it means,
when the recovery gets into full swing. To do so would create a political
liability for the Lee administration, given the claim that the tax cuts are for
the rich.
The criticism is not totally groundless. In 2010, the government is scheduled to
lower the tax rate from 35 percent to 33 percent on the portion of an individual
income that exceeds 88 million won a year, and from 22 percent to 20 percent on
the portion of corporate earnings that exceed 100 million. The government is also
considering phasing out several tax deductions and exemptions, which would hurt
middle and lower classes.
Another problem with tax cuts is that they cannot be thought of in isolation from
other pressing economic issues, such as inflationary pressure, which many
economists say will surge once growth kicks into gear.
True, the prospects of runaway inflation are a cause for concern not only in
Korea but throughout the world. But that does not give any solace to Korean
policymakers, who will have to prepare to set up fiscal and monetary policies to
address inflation and other serious post-crisis economic issues.
The government may have to consider abandoning the second-phase tax cuts in the
context of an exit strategy. It may also have to put the brakes on liquidity
expansion and moderate spending if the economy is confirmed to be strong enough
to generate a healthy rate of growth on its own.
(END)