[Hotterview] "Temporary VAT Reduction on Processed Foods? ... Constitutional Amendment Would Be Easier"

Sangmin Lee, Senior Research Fellow at Nara Salrim Research Institute
Limited Effect on Price Reduction Even with VAT Cut
Attempting to Lower VAT on Specific Items May Undermine VAT Framework

Han Dong-hoon, Emergency Response Committee Chairman of the People Power Party, proposed on the 28th a temporary reduction of value-added tax (VAT) on childbirth and childcare products, processed foods, and other items to alleviate the burden on ordinary citizens amid high inflation. The government has also decided to begin reviewing the proposal. However, Lee Sang-min, Senior Research Fellow at the National Fiscal Research Institute and an expert in budgeting and tax law, criticized the idea, saying, "It is questionable whether inflation will be controlled, and the existing VAT framework itself could collapse," adding, "This is a more difficult issue than constitutional amendment."

Wouldn't lowering VAT help ease the burden of inflation?

Even if VAT is lowered, prices may not decrease, and producers' profits could increase. Processed foods are essential goods, so consumers must buy them regardless of price fluctuations. Lowering VAT does not necessarily lead to price reductions. If consumption can be adjusted according to price, the tax cut benefits consumers, but in cases where producers hold monopolistic power, the benefits of tax cuts may be enjoyed by producers. Therefore, the effect of VAT reduction on price stabilization is inevitably limited.

Handonghun, the Chief Election Strategy Committee Chairman of the People Power Party, is campaigning in support of candidate Yoon Hee-sook, who is running in Jung-gu Seongdong-gu Gap, at Wangsimni Station Plaza in Seoul on the 28th. Photo by Hyunmin Kim kimhyun81@

Why is addressing the VAT issue more difficult than constitutional amendment?

During the COVID-19 pandemic, some European countries lowered VAT rates, but those countries have multiple VAT rates. However, in Korea, the tax rate is a single 10% rate unless exempted or zero-rated. Under the current VAT structure, applying different rates is practically impossible. If VAT is lowered for certain products, others will demand why their rates are not lowered as well. Once exceptions begin, the dam could break. Since this involves changing the tax system itself, it is viewed as a more serious matter.

Concerns were also raised about approaching this through legislative amendments.

It is a matter of timing. If it were an enforcement decree, it could be quickly raised or lowered, but this requires a legislative amendment. It is uncertain when processed food prices will rise or fall, so how can the law be amended in response to price fluctuations? For this reason, the concept of responding to economic fluctuations through legislation has never existed in Korea.