[Why&Next] Why is the Government Playing the Big 'Tax Reduction' Card?

The government is rolling out a variety of tax relief measures in the new year, including abolishing the financial investment income tax (FITS), maintaining the policy of lowering transaction taxes, and reducing taxes for multi-homeowners. It is even considering the 'inheritance tax relief' card. Concerns are rising that frequent tax cuts amid a red alert on national fiscal soundness could further worsen the country's finances. Since the general election is approaching, criticisms are also being raised that these are populist policies.

On the 17th, at the livelihood discussion and Financial Services Commission briefing chaired by President Yoon Suk-yeol, the government officially announced the abolition of FITS and the reduction of transaction taxes, along with plans to expand support for Individual Savings Accounts (ISA). On the same day, the Cabinet meeting revealed a complete overhaul of 91 quasi-tax burden systems, and on the 10th, the Ministry of Land, Infrastructure and Transport briefing announced the abolition of punitive heavy taxation on multi-homeowners and acquisition tax reductions for newly built small houses. On the 4th, the Ministry of Economy and Finance briefing presented measures such as electricity bill reductions for small business owners, temporary cuts in individual consumption tax on old vehicles, and tax credits for research and development (R&D) investments.

In addition, President Yoon stated, "There needs to be a national consensus that inheritance tax is an excessive surcharge," bringing out the inheritance tax abolition card. The government appears to be continuously releasing tax relief measures since the beginning of the year. The problem is the resulting decrease in tax revenue. Abolishing FITS is expected to reduce tax revenue by 1.5 trillion won annually, and lowering transaction taxes could lead to a 10 trillion won decrease over five years. ISA support requires 200 to 300 billion won annually.

Quasi-taxes, which include 91 items expected to collect 24.6157 trillion won this year, will inevitably see a reduction in government revenue following President Yoon's directive for a 'complete overhaul.' The abolition of heavy taxation on multi-homeowners, acquisition tax reductions for newly built small houses, and temporary cuts in individual consumption tax on old vehicles are also expected to reduce tax revenue, while the electricity bill reduction support for small business owners amounts to 250 billion won.

The government cites various reasons such as revitalizing livelihoods, stimulating the economy, and accumulating citizens' assets, but releasing large-scale tax relief measures just three months before the general election has led to criticism that these are 'populist policies for the election.' Lim Oh-kyung, floor spokesperson for the Democratic Party of Korea, expressed skepticism about the FITS abolition plan, saying, "The reason for bringing out a populist policy that undermines taxation principles, tax equity, and financial advancement is ultimately the general election." The civic group, the Citizens' Coalition for Economic Justice, also pointed out, "It is an abstract and populist rhetoric aimed at gaining support from individual investors without any basis just before the general election."

Especially since last year's nearly 50 trillion won decrease in tax revenue triggered a red alert on fiscal soundness, there is a possibility that such policy directions could further deteriorate fiscal health. Critics argue that this contradicts the current administration's emphasis on 'sound fiscal management.' As of October last year, national tax revenue decreased by 50.4 trillion won year-on-year due to declines in income and corporate taxes. The national budget deficit improved from 83 trillion won at the end of June to 52 trillion won in October, but central government debt increased by 5.9 trillion won to 1,105.5 trillion won compared to the previous month.

Jung Chang-soo, director of the National Fiscal Research Institute, pointed out, "The principle is to expand fiscal spending to stimulate the economy during a recession and to reduce it to prevent overheating during a boom. Tax cuts have not proven to have a trickle-down effect, and even supporting scholars only mention long-term effects. Tax cuts could rather shrink fiscal resources and cause a vicious cycle that contracts the economy."

The government rebutted that tax reductions would activate the economy, so the actual decrease in tax revenue would not be significant. Park Chun-seop, chief economic secretary to the president, appeared on KBS News and emphasized, "Consumption increases in sectors where taxes are cut, and many areas can see investment activation. When consumption and investment increase, the economy improves, growth spreads, and more taxes come in, so there is no problem with the tax revenue structure in the end."

The government particularly argued that revitalizing the capital market could bring positive effects to both individual investors and companies. A government official said, "Reducing taxes related to the capital market benefits individual investors while reducing the burden on companies and activating investment, thereby enhancing the attractiveness of the Korean stock market."