Tax Revenue
It has been found that tax revenue collected during the first five months of this year is approximately nine trillion won less than a year ago as corporate tax revenue, which accounts for almost one-third, has decreased by over four trillion won and value-added tax revenue has declined close to two trillion won. The amount of taxes collected is unlikely to increase for the time being in that corporate and value-added taxes are directly related to economic conditions. Furthermore, companies are refraining from making new investments as the government moves ahead with the legalization of the underground economy in its pursuit of economic democratization. This is why aggressive measures are needed to improve investor sentiment.
The national Assembly Budget Office recently published a report on the settlement of accounts for fiscal year 2012, in which it said, "The lack of tax revenue is unlikely to b addressed properly in the near future because the economic recovery is slow and there are some structural reasons with the problem."
As the report says, the Korean economy is having a hard time seeking the opportunity for a rebound. According to economists, a 1% drop in the economic growth rate leads to a 1.4% decline in corporate and individual income taxes, a 0.8% drop in consumption tax, and a 0.7% drop in social security contributions. In other words, economic growth is the most sure-fire way to raise tax revenue.
The government agrees with this view. It expects national tax income to increase at least a little in the second half of this year, building on the revised supplementary budget in May, investment revitalization measures the same month, and service industry promotions planned for July. The Ministry of Strategy and Finance has adjusted its economic growth rate forecast for this year upward from 2.3% to 2.7% as well, adding to the belief that the country can achieve 4% growth in 2014.
However, things appear quite gloomy. Domestic consumption, which has a direct influence on value-added tax and special excise tax, fell 0.4% year-on-year in Q1, 2013. Furthermore, the private consumption growth rate dropped from 2.4% to 1.7% between 2011 and 2012. Value-added tax revenue between January and May this year totaled 23.445 trillion won, 1.827 trillion won less than a year earlier. Likewise, special excise tax revenue fell 52.3 billion won during the same period.
To compound the matter, stock trading turnover stood at 651 trillion won in the first half of the year, the lowest since the latter half of 2006, and helping to drag down the amount of stock exchange tax collected by 438.1 billion won year-on-year. The housing market also remains in a slump, decreasing the ratio of asset-related taxes, such as transfer, comprehensive real estate holding, inheritance and gift taxes, from 15.1% to 10.2% between 2007 and 2012.
Meanwhile, the sales and operating profits of companies have also dropped, increasing the possibility of the worst ever corporate tax collection record. The amount for the first five months of 2013 fell 4.344 trillion from a year ago to stand at 19.938 trillion won, which is equivalent to just 43.4% of the government’s target. At the end of May last year the figure stood at 52.9%.
The situation is even worse when payments are looked into by corporation because the larger ones, who account for at least 30% of the corporate tax income, are showing poor performances. In Q1, Hyundai Motor Company and Kia Motors paid 656.3 billion won and 187.3 billion won in corporate tax, respectively, 5.8% and 48.9% less than a year earlier, respectively. The rate of decrease stood at 68.6% for POSCO, 48.4% for SK Innovation, 54.2% for S-Oil, and 26.5% for LG Electronics.
“Some research institutes are predicting that major companies, with the only exception of Samsung Electronics, will pay 50% to 70% less corporate tax this year,” said an industry insider.
In short, an increase in tax revenue is unlikely unless the government comes up with some trump cards. One of the most viable options is another revised supplementary budget as the Park Geun-hye government is opposed to increasing taxes. It is saving the option for now though. “It is too early to talk about another revised supplementary budget with the first one only having been implemented in May and the effects having yet to appear,” said the Ministry of Strategy and Finance.