Where Did the 30 Trillion Won Tax Revenue Shortfall Come From? A 23 Trillion Won Gap in Corporate and Income Taxes

Mobilizing All Available Resources Instead of Additional Revenue Supplement

The government's tax revenue forecast for this year has a shortfall of 30 trillion won due to a larger-than-expected deterioration in major tax revenues such as corporate tax and real estate capital gains tax. The expected shortfall in corporate and income taxes accounts for most of this, totaling 22.9 trillion won. Following last year's record-breaking tax revenue shortfall of over 56 trillion won, a large-scale tax revenue shock has materialized for the second consecutive year.

According to the "2024 National Tax Revenue Re-estimation" announced by the Ministry of Economy and Finance on the 26th, this year's tax revenue is expected to decrease from the initially forecasted 367.3 trillion won to 337.7 trillion won. The tax revenue error rate is 8.1%, marking a large-scale forecasting error following last year's record-high error rate of 14.1% based on tax revenue shortfall. In 2021 (21.7%) and 2022 (15.3%), tax revenues exceeded expectations, resulting in positive forecast errors.

Song Eon-seok, Chairman of the National Assembly's Strategy and Finance Committee, is striking the gavel at the plenary meeting of the Strategy and Finance Committee held at the National Assembly on the 12th. Photo by Kim Hyun-min kimhyun81@

Tax Revenue Forecasts Missed for 4 Years, Corporate Tax Shortfall Accounts for Half

Looking at the tax categories in this re-estimation, the corporate tax shortfall was the largest at 14.5 trillion won, accounting for half of the total shortfall. The corporate tax budget was 77.7 trillion won, but only 63.2 trillion won is expected to be collected this year. This is due to the deterioration of corporate performance caused by last year's global trade contraction and semiconductor industry downturn. In fact, corporate tax revenue from January to July this year dropped sharply by 15.5 trillion won compared to the previous year. Operating profits of listed companies on an individual basis plummeted by 44.2%, from 84 trillion won in 2022 to 46.9 trillion won last year.

Income tax revenue is expected to be 117.4 trillion won, 8.4 trillion won (6.6%) less than this year's budget of 125.8 trillion won. The decrease in these two tax categories alone amounts to 22.9 trillion won, which is 49% of the total tax revenue decline of 29.6 trillion won. Among income taxes, the capital gains tax revenue fell sharply by 5.8 trillion won compared to initial expectations. Value-added tax is expected to increase by 2.3 trillion won, making it the only major tax category to record a positive change. Other taxes such as inheritance and gift tax (500 billion won), securities transaction tax (400 billion won), transportation, energy, and environmental taxes (4.1 trillion won), and customs duties (1.9 trillion won) are also expected to experience shortfalls.

Jeong Jeong-hoon, Director of the Tax Policy Bureau at the Ministry of Economy and Finance, explained the large-scale tax revenue error by stating, "The decrease in corporate tax revenue due to last year's global trade contraction and semiconductor industry downturn was larger than initially expected, and the continued sluggishness in real estate transactions led to poor tax revenue related to the asset market, such as capital gains tax." The government attributes the increased volatility in tax revenue to growing uncertainties in domestic and international economic conditions, but it is difficult to avoid criticism that the government’s overly optimistic macroeconomic outlook caused the large-scale tax revenue shortfall.

No Supplementary Budget, Mobilizing Existing Resources... "Improving Forecasting Models"

Despite the tax revenue shortfall, the government announced that it will not prepare a supplementary budget requiring additional bond issuance. This is because the conditions for a supplementary budget under the National Finance Act, such as economic recession and mass unemployment, are not met, and issuing additional bonds for the supplementary budget would increase the burden on future generations and damage external credibility. Instead, the government plans to cover the shortfall as much as possible through fund surpluses and unused budget allocations, but securing resources is reportedly challenging.

The Ministry of Economy and Finance did not specify exactly where and how it will raise the 17.76 trillion won tax revenue shortfall that the central government must cover out of the total 29.6 trillion won shortfall. The Foreign Exchange Stabilization Fund, which was used as a financial resource last year, is planned to be repaid substantially to the Public Fund this year, and the size of the global surplus fund has also significantly decreased to 2.7 trillion won last year, indicating a difficult situation. Ahn Sang-yeol, Director of Fiscal Management at the Ministry of Economy and Finance, said, "We will respond by utilizing fund resources, reducing local government grants and subsidies, and adjusting projects that are difficult to execute within the year," adding, "We will decide on response measures after consultations with the National Assembly."

The government's tax revenue forecasts have missed the mark for four consecutive years, clearly revealing the limitations of the Ministry of Economy and Finance's predictive capabilities in gauging economic trends. On this day, the Ministry announced measures to reduce repeated tax revenue forecasting errors. They plan to increase participation from specialized institutions in the tax revenue estimation process and refine the tax revenue estimation models to improve forecasting accuracy. The Ministry explained, "Starting next year, specialized tax revenue estimation institutions such as the National Assembly Budget Office, Korea Institute of Public Finance, and Korea Development Institute (KDI) will participate in all stages of tax revenue estimation. The government will disclose its estimation models and key tax information in detail to participating institutions and discuss major tax revenue estimation issues from the ground up."