ed Korea's war against untaxed economy

By Lee Chang-sup

Lately, many high-income earners, including lawyers, doctors, businessmen and professors, are spending sleepless nights as they face stricter tax audits.

These stricter audits are unprecedented. Although President Park Geun-hye has pledged she would not raise taxes during her presidency, she has declared a war against tax evasion. She said over the next five years, the government would collect $28 billion in taxes from those who have evaded them. This amount represents 8 percent of this year’s national budget.

A new legislation will leave little room for the rich to hide their wealth. Starting this year, a higher income tax will be applied to those earning more than 20 million won (about $19,000) annually in interest and dividend income, down from 40 million won last year. The National Assembly would also mandate financial regulators to share depositors’ banking information with the National Tax Service. Under this plan, the tax office will monitor all banking transfers of more than 10 million won (about $9,800). The tax office will especially focus on offshore bank account holders, traders in liquors, oil and real estate, and owners of companies.

The President commands applause for trying to increase funding for welfare without raising taxes. However, the rich have found ways to get around the new audits. For example, since President Park took oath in February, sales of safe boxes and cash counting machines have reportedly risen dramatically.

Another tactic the rich have adopted to evade taxes is converting their assets into gold bars and banknotes. Although international gold prices have fallen, Seoul banks reported a double-digit rise in gold bar sales. According to a Seoul banker, who declined to be named, a customer must wait for a week to buy gold bars. He also says many rich customers withdraw 50,000-won banknotes, which may indicate customers hoard high-denomination and untraceable banknotes at home. However, a Bank of Korea official said it is difficult to identify this trend clearly as stashing, and the increase in demand for banknotes may be due to the record-low interest rate.

The ongoing war against tax dodgers is rather late as underreporting has already significantly expanded. An emeritus professor at Ehwa Womans University says underreporting in Korea is larger than in many other OECD countries. Underreporting is difficult to identify, and thus uprooting it would be all but impossible.

Financial Services Commission Chairman Shin Je-yoon estimated that 17-23 percent of businesses are untaxed. Similarly, Hyundai Research Institute stated that the untaxed economy represents 23 percent of the gross domestic product or $280 billion. This percentage is higher than the OECD average of 15 percent.

A criticism of these new tax audits is that they lead to unnecessary auditing. For example, a high-income advisor at Korea’s largest law firm said the tax office incorrectly regarded cash transfers between family members as tax evasion, and the ensuing audits strained family relations. He said, for example, the tax office has questioned his wife about a large sum of money she received from him. Thus he decided to manage his money instead of transferring it to his wife for the daily management of household affairs. Instead, he gave his wife and two college-age children his credit cards.

In another example, a CEO in southern Seoul was asked by the tax office in northern Seoul to provide information on stock transactions between him and his siblings. This audit was unusual because the tax office that approached him was outside of his district. This may indicate that tax officials nationwide are pressured to collect as much tax as they can.

These stricter tax audits also negatively affect businesses. For example, a conglomerate spokesman said new audits of his company would take twice as long as previous ones. Moreover, over-the-counter stock trading has halved last month due to privacy concerns after the tax office has asked securities companies to submit information for all buyers and sellers.

The campaign against tax evasion is appealing politically but not economically. Even lawmakers of the governing Saenuri Party said the plan was too idealistic, and the government would be unable to meet its tax quota. Further, the stricter tax audits are ill-timed as the economy is in a downturn. The government might end up contracting the economy by causing capital to leave the country.

Another criticism of the tax office is the onerous and inconsistent implementation of tax laws. According to the IMF, many countries have been unable to eradicate the underground economy, and in some cases, have only made it worse, because of this issue. A 2012 IMF working paper showed that the underground economy grows “when regulations are onerous; enforcements are inconsistent and corruption is widespread.”

If Korea’s stricter tax audits are to be successful, the tax codes should be clear. Korea’s tax codes are often arbitrary and thus trigger different interpretations. In addition, the tax office should improve its integrity. Many tax collectors have been arrested for bribery, eroding the public’s confidence in the country’s 20,000 tax collectors. The tax office has adopted other unethical tactics such as publicly humiliating underreporting taxpayers. Motivated by politics, it has also used tax audits to extort from recalcitrant corporations.

Because of these problems, the government should find other ways to increase tax revenue such as by creating additional jobs, providing incentives to honest taxpayers and simplifying tax codes.

Lee Chang-sup is the executive managing director of The Korea Times. Contact him at editorial@koreatimes.co.kr.