Status of Tax and Direct Expenditures for Welfare Policies Related to Child Rearing and Implications
Published June, 2016
In general, the calculation of the fiscal scale of a state only considers direct expenditure. However, as tax expenditures that lower the tax burden of the people have an impact on national finance, it is recommended to take note of such tax expenditures. In this regard, this report reviews the status of tax expenditures as well as direct expenditures, examines issues of the welfare system, and conducts an empirical analysis on welfare allowances by income bracket, specifically focused on the earned income tax credit (EITC) and welfare policies related to child rearing, resulting in related suggestions.
The direct expenditure of the central government in 2016 (based on the governmental budget) stands at KRW 386.4 trillion, with the total amount of its expenditure increasing to KRW 421.7 trillion with the addition of KRW 35.3 trillion in tax expenditures. In particular, the social welfare sector has shown a rapid rise both in direct and tax expenditures to a whopping KRW 123 trillion. Meanwhile, as direct and tax expenditures to finance welfare are managed by the Ministry of Health and Welfare and the Ministry of Strategy and Finance, respectively, comprehensive control is difficult and the efficiency of their policy design remains low. In detail, both direct and tax expenditures for welfare policies related to child rearing are growing to promote the birth rate, but the actual welfare benefits given to each eligible household are difficult to quantify under the current governmental tracking system, which poses a challenge to determining whether the governmental support scale is adequate.
According to the analysis of benefits and allowances from EITC and welfare policies for child rearing by income bracket (tax credit for households with children, child tax credit (CTC), home care allowances, and childcare subsidy), 1.74 million households, many of which are rearing an infant, are estimated to receive benefits from both direct and tax expenditures. Their average allowances from programs for child rearing stand at KRW 5.28 million per year, or 11.6% of KRW 45.47 million, the country’s average private income. Yet, in the case of some items financed by both direct and tax expenditures under the same policy goal of supporting infant rearing, unifying them into the category of direct expenditure can be considered, if possible.
For EITC and CTC ,which are paid in cash and managed as tax expenditures, and therefore not included in the expenditure budget, the current policy needs to be maintained while improving the accounting process. More accurate welfare spending information is expected to be collected by managing tax cut items of EITC and CTC as tax expenditure—the deduction of receipts—and those paid in cash as spending—outlays—as in the cases of the US and the UK.