Total revenue in 2012 stood at 341.8 trillion KRW, 1.7 trillion KRW less than the budget (343.5 trillion KRW), due to reduced tax revenue resulting from the ongoing economic stagnation. Revenue from national taxes reached 203.0 trillion KRW, which is 2.8 trillion KRW less than the budget (205.8 trillion KRW). The downturn in tax revenue has continued to accelerate throughout the first half of 2013. As of April 2013, accumulated tax revenue totals 73.7 trillion KRW, a 9.3 trillion KRW decline from the previous year (83.0 trillion KRW).
The continued downturn in tax revenue appears to arise partially from non-business structural factors, in addition to business factors. Major factors include a decline in revenue from corporate taxes compared to operating surpluses due to decreased tax rates; a decline in tax revenue elasticity due to the stagnant capital market; and a fall in the effective protective tariff rate as a result of trade liberalization.
Amidst the wavering economic recovery, it is projected that the recent slump in tax revenue will not be resolved in the near future due to structural factors. Proper measures must be taken and the budget compilation for next year must be carried out in a meticulous manner considering the shortage of tax revenue is expected to go from bad to worse in 2013.
It is necessary to offset the decline in tax revenue due to structural factors by strengthening tax administration and taking bolder steps to cut tax expenditures to lay a solid foundation for financial stabilization. Also, there should be discussions on mid-term and long-term tax reform plans, which incorporate effective breakthroughs.
The Analysis of Controversial Issues, incorporated in FY 2012 Total Revenue Settlement Analysis, focuses on the causes of errors in national tax revenue projections; the causes of the slump in customs duties; and an increase in the amount of national taxes in arrears.
First, the shortfall in national tax revenue in 2012 compared to the budget (2.8 trillion KRW) stems from an optimistic economic outlook, the failure to reflect the effect of tax revenue resulting from partial tax law revisions, and flaws in the tax revenue estimation model. The Korean government projected the nominal growth rate to be 7.6% at the time of budget compilation for 2012, but it barely reached 3.0%. Also, the effect of tax revenue resulting from tax law revisions, such as the withdrawal of the decision to cut maximum income tax and corporate tax rates and the decision to lower earned income tax deducted at source, had not been reflected as the revisions took place after budget compilation. The government should refrain from giving a bullish outlook based on inflated growth potential and strive to improve the accuracy in its economic and tax revenue forecasting abilities.
Second, the recent slump in customs duties (1.8 trillion KRW less than the budget) is seen to be triggered not only by decreased imports but also by the increasing preferential tariff application rates of FTA partner countries (namely, the EU and US). As the decline in the effective tariff rate is projected to persist due to continued trade liberalization, the increase in customs duties is also expected to slow on a continual basis.
Third, despite some reduction in income tax rates, a notable increase in global income tax and earned income tax has been witnessed (general income tax by 30.3% in 2011 and 19.7% in 2012 and earned income tax by 18.2% in 2011 and 7.0% in 2012). Presumably, broadening tax base, achieved by the reduction of non-taxpayers through the increase in the income declaration rate of individual businesses and the fall in the effective deduction rate (tax deductions/income), offset the drop in tax revenue resulting from tax reduction.
Fourth, the increase in taxes arrears rose to 8.0% in 2012 from 5.0% in 2011. Therefore, it is critical to improve the collection rate of national taxes in arrears by taking steps more actively such as banning taxpayers who have large unresolved tax liabilities from leaving the country; extending the extinctive prescription period of the tax collection authority; and increasing the spectrum of KoFIU's information shared with the National Tax Service.
In addition, the FY 2012 Total Revenue Settlement Analysis looks into the causes of the increase in revenue from contributions (occupational health and safety insurance and employment insurance) compared to the budget; the poor record in the collection of fines; the poor record in the collection of land sale fees; and the poor record in the collection of environmental improvement special account charges.
Kang Minji
The continued downturn in tax revenue appears to arise partially from non-business structural factors, in addition to business factors. Major factors include a decline in revenue from corporate taxes compared to operating surpluses due to decreased tax rates; a decline in tax revenue elasticity due to the stagnant capital market; and a fall in the effective protective tariff rate as a result of trade liberalization.
Amidst the wavering economic recovery, it is projected that the recent slump in tax revenue will not be resolved in the near future due to structural factors. Proper measures must be taken and the budget compilation for next year must be carried out in a meticulous manner considering the shortage of tax revenue is expected to go from bad to worse in 2013.
It is necessary to offset the decline in tax revenue due to structural factors by strengthening tax administration and taking bolder steps to cut tax expenditures to lay a solid foundation for financial stabilization. Also, there should be discussions on mid-term and long-term tax reform plans, which incorporate effective breakthroughs.
The Analysis of Controversial Issues, incorporated in FY 2012 Total Revenue Settlement Analysis, focuses on the causes of errors in national tax revenue projections; the causes of the slump in customs duties; and an increase in the amount of national taxes in arrears.
First, the shortfall in national tax revenue in 2012 compared to the budget (2.8 trillion KRW) stems from an optimistic economic outlook, the failure to reflect the effect of tax revenue resulting from partial tax law revisions, and flaws in the tax revenue estimation model. The Korean government projected the nominal growth rate to be 7.6% at the time of budget compilation for 2012, but it barely reached 3.0%. Also, the effect of tax revenue resulting from tax law revisions, such as the withdrawal of the decision to cut maximum income tax and corporate tax rates and the decision to lower earned income tax deducted at source, had not been reflected as the revisions took place after budget compilation. The government should refrain from giving a bullish outlook based on inflated growth potential and strive to improve the accuracy in its economic and tax revenue forecasting abilities.
Second, the recent slump in customs duties (1.8 trillion KRW less than the budget) is seen to be triggered not only by decreased imports but also by the increasing preferential tariff application rates of FTA partner countries (namely, the EU and US). As the decline in the effective tariff rate is projected to persist due to continued trade liberalization, the increase in customs duties is also expected to slow on a continual basis.
Third, despite some reduction in income tax rates, a notable increase in global income tax and earned income tax has been witnessed (general income tax by 30.3% in 2011 and 19.7% in 2012 and earned income tax by 18.2% in 2011 and 7.0% in 2012). Presumably, broadening tax base, achieved by the reduction of non-taxpayers through the increase in the income declaration rate of individual businesses and the fall in the effective deduction rate (tax deductions/income), offset the drop in tax revenue resulting from tax reduction.
Fourth, the increase in taxes arrears rose to 8.0% in 2012 from 5.0% in 2011. Therefore, it is critical to improve the collection rate of national taxes in arrears by taking steps more actively such as banning taxpayers who have large unresolved tax liabilities from leaving the country; extending the extinctive prescription period of the tax collection authority; and increasing the spectrum of KoFIU's information shared with the National Tax Service.
In addition, the FY 2012 Total Revenue Settlement Analysis looks into the causes of the increase in revenue from contributions (occupational health and safety insurance and employment insurance) compared to the budget; the poor record in the collection of fines; the poor record in the collection of land sale fees; and the poor record in the collection of environmental improvement special account charges.
Kang Minji