Tax Reform for Aging Societies in Korea. Joosung Jun (Ewha Womans University)

Transcription

1 Tax Reform for Aging Societies in Korea Joosung Jun (Ewha Womans University) 1

2 Organization of Talk Population Aging and Related Facts Policy actions, fiscal conditions, etc. Current Korean Tax System Evolving toward ones observed in rich countries Still, narrow bases / non-optimal features Directions for Reform Informal activity and base-broadening (PIT/VAT) Role of corporate tax: Conventional vs. Revenue raiser? Tax on the rich? (income shifting, rent tax) Tax expenditures, earmarking, transaction taxes, surcharges, etc. 2

3 Population Aging in Korea (% of total population) 3

4 Population Aging in Korea / POP / POP / POP Old age dependency rate Life expectancy Births (in thousands) Total Fertility Rate - 1, n.a. n.a. 4

5 Population Aging in Korea Rapidly aging population Old age dependency rate: (1980) 5.4 (2010) 15.1 The lowest total fertility rate(2011) (FRA) 2.0 (US) 1.89 (OECD) 1.70 (EU28) 1.56 (JPN) 1.39 (KOR) 1.24 The highest relative poverty rates among the elderly (old age / total population, 2011) (KOR) 48.6/ 14.6 (US) 18.8 / 17.4 (JPN) 19.4 / 16.0 (OECD) 12.3/ 11.5 (SWE) 10.1 / 9.7 5

6 Policy Measures to Address Aging Pensions: Expanded coverage, but unsustainable Need to fix low burden, high-benefits scheme Expenditure: Rising welfare expenditure Focused on child-care support Revenue: Subsidies for old-aged & families with children Piecemeal revisions; no serious reform efforts 6

7 Changing Spending Priorities (% GDP) Source: The Bank of Korea 7

8 Welfare Expenditures (% of GDP) Korea OECD Sweden U.S Japan n.a. Source: OECD SOCX Database 8

9 Fiscal Policy and Gini coefficient Source: Statistics Korea, The Bank of Korea 9

10 Comparison of Personal Income Tax Korea OECD U.S. Sweden % of GDP % of tax rev Top rate % of GDP % of tax rev Top rate % of GDP % of tax rev Top rate % of GDP % of tax rev Top rate Notes: Surtaxes are included. Source: OECD Tax database 10

11 Budget Deficits and Public Debt (% of GDP) Source: Ministry of Strategy and Finance 11

12 Consolidated Central Government (% GDP, National Assembly Budget Office) Total revenue(1) Tax revenue Social security contributions Nontax revenue Total expenditure(2) Mandatory spending Social insurances Pensions Discretionary spending Consolidated fiscal balance(3)=(1)-(2) Social security funds balance(4) Adjusted balance(5)=(3)-(4) Public debts

13 Korea s Evolving Tax Structure During the past thirty years, Korean per capita GDP grew from $4,000 to $23,000 (2005 $) Korea s tax structure has changed dramatically during the same period ( ) Tax Revenue has grown from 17% of GDP to 25% Excise taxes and customs duties fell from 40.7% of tax revenue to 14.0% of revenue Income and payroll taxes grew from 26.6% of tax revenue to 54.6% of revenue Consumption taxes fell from 47.5% to 28.2% 13

14 Korea s Evolving Tax Structure Still, narrow base - PIT plays a minor role (15.0% of revenue/3.7% GDP vs. 24.5%/8.6% OECD in 2012) - Tax expenditures for PIT ( 33.4% of taxes paid) - Informal sector 26% (OECD 17%, US 9%. Avg99-10) - CIT/VAT fall mostly on large corporations Unconventional instruments - Earmarked taxes (17.3% revenue / 3.5% GDP) - Transaction taxes; surcharges (8% revenue) 14

15 Tax Revenue as percentage of GDP Change Korea (16.9) (18.8) (19.1) (21.5) (22.5) (23.2) (24.8) (7.8) OECD (30.1) (32.2) (33.6) (34.3) (34.0) (32.8) (33.7) (3.6) U.S (25.5) (26.3) (26.7) (28.4) (26.1) (23.7) (24.4) (-1.1) Sweden (43.7) (49.5) (45.6) (49.0) (46.6) (43.1) (42.3) (-1.4) Notes: 1. Figures in parentheses are with social security contributions included. 2. Unweighted averages. Source: OECD (2014), Revenue Statistics

16 Structure of Tax Revenue % of GDP % of total tax revenue Total tax revenue Income Personal income tax Corporate income tax Social security contributions Consumption Value added tax Excise taxes Property Taxes on wealth holding Taxes on transactions Customs duties Note: 1. Surtaxes are included where relevant. 2. Local consumption tax is included in value added tax in

17 Structure of Tax Revenue Korea (% of total tax revenue) OECD Income taxes Personal income tax Corporate income tax Social Security Contributions Property taxes Consumption taxes Other taxes Notes: 1. Surtaxes are included where relevant. 2. Customs duties are included in consumption taxes. Source: OECD Tax database 17

18 Trends in Major Taxes (% of GDP) 18

19 Tax expenditures, 2012 Central government tax revenue Tax expenditure billion won % billion won % (1) (2) (3) (4) (3)/(1) Personal income tax 45, , Corporate income tax 45, , Value added tax 55, , Other taxes 44, , Total tax revenue 192, ,

20 Comparison of Tax Structures Tax Revenue (% of GDP) Income and Social Security Taxes (% of Re venue) Corp Income Tax (% of income taxes) Consumption and Production Taxes (% of R evenue) Border Taxes (% of Revenue) Informal Economy (% of GDP) All dev eloping Korea OECD Source: Gordon and Jun (2014) 20

21 Comparison of Tax Structures Korea s tax structure at this point is intermediate between those seen in other developing countries and the typical tax structure among OECD countries As the economy grows, the expectation is that the personal income tax will grow in importance and the corporate tax will play a less dominant role. 21

22 Why do revenue figures vary so much among countries? Maximum Corp Tax Rate Maximum Personal Tax Rate Maximum VAT rate Developing 26.7% 34.7% 14.7% Korea 24.2% 38.5% 10% Developed 29.6% 42.8% 16.2% Source: Gordon and Jun (2014) 22

23 Why do revenue figures vary so much among countries? As seen in the table, the sharp differences in tax revenue from each of the major taxes do NOT primarily reflect differences in tax rates. Korean statutory tax rates a bit on the low side in comparison to other countries, but differences are small. Instead revenue difference largely reflects differences in the size of the informal economy. Tax revenue/(gdp in the formal sector) broadly comparable in Korea and OECD countries as a whole (25% / 74% = 33%; 42.2% for OECD) 23

24 Rates of evasion then central to the evolution of tax structures Given high evasion rates on broad-based income and consumption taxes, developing countries make use of many supplementary sources of revenue that are easier to enforce Tariffs Excise taxes Seignorage 24

25 Rates of evasion then central to the evolution of tax structures Policies also commonly favor those sectors where compliance is greater Favorable access to bank loans; Protection through tariffs; Protection from competition from foreign subsidiaries Only when evasion rates drop enough do we see tax structures that broadly correspond to the recommendations of existing optimal tax theories 25

26 Optimal tax theory vs. Tax Structure Standard optimal-tax theory focuses on changes in labor supply / saving But changes in evasion can be the dominant source of efficiency losses in many developing countries. When evasion rates are important, policy choice must focus primarily on reforms that reduce evasion rates 26

27 What policies can reduce evasion? Economic growth per se More productive firms find it more costly to operate in the informal economy Publicly traded firms face pressures from market to report higher profits, even at cost of paying higher taxes Economic growth in Korea during the last thirty years has indeed increased tax revenue/gdp: from 16.9% to 24.8%, largely due to increased compliance 27

28 What policies can reduce evasion? Various policies already in use in Korea: Encourage more firms to list on the stock exchanges Subsidize use of credit cards (cash receipts) Subsidize firms to adopt electronic reporting of transactions to the government Presumptive value-added taxes at reduced rate, to pull more firms into the formal sector But informal economy remains large 28

29 Compliance and Self-employed Informal sector consists largely of self-employed - The self-employed (+unpaid family members): about 30% of the formal labor force; a much larger fraction of the overall labor force Evasion opportunities in the formal sector - 54% of PIT through withholding taxes on wages/salaries; dividends/interest ( shifting ) - 22% from taxes on the self-employed Simplified tax schemes (PIT/VAT) 29

30 Personal Income Tax, 2012 Taxpayers Taxes paid (in thousands) (%) (%) Wages and Salaries tax (withholding) 15, Under-threshold 5, Paying taxes 10, million won+(high bracket, 35-38%) million won(24%) Global income taxes (tax returns) 5, Under-threshold 1, Paying taxes 4, Bookkeeping 2, Income estimation 1 1, million won+(high bracket, 35-38%) million won(24%) Source: National Tax Service (2014), Statistical Yearbook of National Tax, and author's calculations 1. Also includes those who do not file tax returns, the number of which are estimated by the National Tax Service using business-registration information. 30

31 Personal Income Tax, 2012 Billion won % of GDP % of PIT Personal income tax 45, Wages and salaries income (withholding) 19, Global income (tax returns) 9, Dividends and interest income (withholding) 5, Capital gains (tax returns) 7, Other income 1 3, Source: Ministry of Finance and Economy 1 Withheld parts of business and retirement income, timber income, etc. 31

32 VAT Burden, 2012 Taxpayers (in thousands) (%) Taxes paid (billion won) (%) General 3, , Corporation , Individuals 3, , Simplified+Exemptions 1, Total 5, ,

33 Compliance among the self-employed 33

34 Compliance with VAT and corporate tax in Korea C-efficiency of VAT (right scale) Implicit base of CIT (left scale)

35 Suggestions on other policies to increase size of formal sector Presumptive tax (corporate plus VAT) on any sales to an unregistered firm Reduces an existing tax advantage faced by informal firms Leads some informal firms to become formal, generating both revenue and an efficiency gain Contract enforcement limited to firms in the formal sector. Potentially a revenue and efficiency gain as well. 35

36 Suggestions on policies to increase compliance with the income tax Link corporate tax base more closely to accounting profits reported to shareholders Tie social benefits (UI and SS) more closely to reported income under the personal tax. This converts a tax into a user fee, reducing tax distortions. 36

37 The Role of the Corporate Tax Politically popular (tax on chaebols, the rich?) Conventional recommendations A backstop to PIT (esp. self-employed) Revenue raiser despite distortions? Large base; better compliance and, The Interplay between PIT and CIT Corporate rates far below top personal rates Corporate governance: owner-managers Taxing rents? (mobile vs. Locally embedded?) Managerial diversion 37

38 Why Is Corporate Tax Base Large? Revenue Raiser (3.7% of GDP; 14.9% of taxes) Even higher than developing country average Easy to monitor capital-intensive firms High ETRs on these firm which are less likely to evade taxes; lower rates on the rest (shifting tax burden from labor to capital income) Such distortions can be offset through other policies favoring firms paying more taxes Leaving personal income within corporations 38

39 Personal and Corporate Tax Rates Personal income tax Corporate income tax Top Rate Top Rate Inclusive of Surcharges 1 Top Rate Top Rate Inclusive of Surcharges 1 Bottom Rate Inclusive of Surcharges 1 (2)-(4) (2)-(5) (1) (2) (3) (4) (5) (6) (7) Note: 1. Currently, a 10 percent local income tax is levied on personal/corporate income taxes payable. 39

40 Better coordination of personal and corporate tax rates To avoid distortions to where income is reported, tax rate should be the same regardless of whether income is reported as personal or corporate Current rate difference, in contrast, encourages shifting expenses to non-corporate firms, e.g. noncorporate investment funds, and income to corporate firms. Low corporate rate undermines accurate reporting of wages paid to high-bracket employees Rate difference helps explain high corporate tax base 40

41 Raising corporate rate and reducing personal tax rate? Possible compensating tax changes: corporate Introduce expensing for new investment, linked to an increase in the corporate tax rate Cut taxes on financial sector, linked to an increase in the corporate tax rate Possible compensating tax changes: personal Introduce excise taxes on luxury goods, linked to a cut in top personal tax rates Cut wage subsidies, and compensate by cutting personal tax rates 41

42 Corporate Tax Burden, 2012 Tax base Taxpayers Taxes paid (100 million won) (Number of firms) (%) (billion won) (%) Low bracket(10%) 422, Deficit 222, , Middle (20%) 59, , , , , , High bracket(22%) , , , , , Total 482, ,

43 Rents and Corporate Governance Profits (taxes) are highly concentrated 62/191 firms (0.01/0.04%) 41.1/19.2% of tax Immobile rents? Return on entrepreneurial efforts vs. locally embedded (linked to government, affiliates, etc.) Foreign ownership 33%; Samsung elect. 49.7% Rent subject to managerial diversion less mobile? (Korean firm data: corporate governance affects the effects of tax-induced rents on firm value - extent of rent diversion) 43

44 Note on international tax issues Multinationals here and elsewhere face incentive to shift reported earnings abroad To lessen these distortions, repatriated profits should be subject to domestic corporate taxes, with a credit for taxes paid abroad to abide by OECD rules Korea can also face threat of portfolio investments shifting abroad to avoid domestic taxes. Can justify cut in taxes on personal financial income. 44

45 Taxation of Financial Sector, 2012 Taxes on financial services 6.38 trillion won 0.46% of GDP Education tax Special tax for rural development Security transaction tax Source: National Tax Service (2013), Statistical Yearbook of National Tax. 1 The education tax is levied on financial institutions at 0.5 percent of gross receipts. 2 The securities transaction tax (0.15 percent and up) and a special tax for rural development (0.15 percent) are levied on the value of securities transactions. 45

46 Taxation of Financial Sector Significant source of tax revenue in Korea Gross receipts; Financial Transactions Justifications for these taxes questionable Tax discourages use of financial sector, leading firms to operate instead in the cash economy To neutralize this incentive to shift into the informal sector, other tax rates must fall A drop in taxes on financial sector pulls firms into the formal sector 46

47 Earmarking, etc. Earmarked taxes have been important source of tax revenue in Korea (Bird and Jun 2005) - About 17% of revenue from such taxes But, T&E linkage is mostly loose and not based on benefit rationale - Earmarked funds are inframarginal; mostly used for compliance purpose - Fiscal transparency/accountability issues remain Surcharges; Transactions taxes 47

48 Social Security Financing Earmarking vs. General Budget Economic rationale Relatively tight linkage of T&E based on benefit rationale (efficiency) (Inter-temporal) contractual arrangements General-fund financing Revenue pressure may be larger Partial (mandatory) subsidization may cause bigger problems (government-employee pension in Korea) 48