President's 'indiscriminate' tax cut drive raises concerns over snowballing fiscal deficit

President Yoon Suk Yeol speaks at a policy debate on financial markets at the Korea Exchange in Yeouido, Seoul, Wednesday, when he addressed a need for bold tax reform. Yonhap

The government is accelerating its tax cut drive, even after its eased tax policy last year failed to generate sufficient tax revenue and instead is estimated to post a record tax shortfall of nearly 60 trillion won ($44.89 billion).

The tax cut drive is being carried out under the belief that it can bolster corporate investment and increase the profitability of private businesses, which can subsequently afford to pay more taxes and better serve President Yoon Suk Yeol’s vision of market-driven economic growth.

The anticipated spillover effects from the loosened tax rules, however, are less likely this year, which is consequently heightening concerns over a fiscal deficit.

Calculated by the difference between the government’s income and spending, the fiscal deficit is a broader term than tax shortfall.

“The purpose of the tax cut policy sounds plausible but not realistic at the moment as businesses are struggling to make profits against high inflation, the high interest rate and other economic challenges,” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).

Joo Won, deputy director of the Hyundai Research Institute, voiced a similar view, by saying, "The tax shortfall casts doubts on the government's plan to lower the fiscal deficit."

Tax shortfall is deepening the fiscal deficit that is estimated to expand to 92 trillion won this year.

The amount will come to 3.9 percent of gross domestic product, surpassing the 3 percent cap pursued by the Yoon administration as part of its fiscal soundness policy.

For the past 30 days until Friday, the government introduced about 20 measures that collectively are expected to reduce this year’s tax revenue by more than 5 trillion won from the initial estimate.

The measures are noteworthy as they involve a wider range of sectors within finance and commerce compared to last year’s when attention was centered on a corporate tax cut — from 25 percent to 24 percent — for businesses in general.

The measures include a raise in the capital gains tax threshold from 1 billion won to 5 billion won for large shareholders as announced on Dec. 21.

On Jan. 2, the government also announced another year-long extension on a tax exemption for facility investment, after the measure took temporary effect in early 2023.

On Jan. 15, the government separately decided to extend a 12-month tax exemption on investments in technologies classified as strategically crucial for the national interest, such as semiconductors.

The stock transaction tax rate this year is set to fall 0.18 percent in 2024, in line with a plan to drop the rate to 0.15 percent by 2025.

Furthermore, Yoon pledged to scrap a planned capital gains tax on income from financial investments, a step further from his earlier decision to delay the effect of the rule until 2025 from 2023.

The president on Wednesday hinted at a need to cut the “excessively high” inheritance tax rate, which currently stands at a maximum of 50 percent, which is the second-highest in the OECD but advocated for by liberals as being necessary to curb wealth inequality.