Analysis of the 2016 Tax Revision Bill
October 12, 2016
Tax Analysis Division of the Economic Analysis Office
The 2016 Tax Revision Bill, which the government submitted to the National Assembly on September 2, envisions a “competitive and impartial tax scheme with principled approaches,” underpinned by fundamental strategies to boost the economy, secure stable livelihoods for the public, promote fair taxation, and establish a more reasonable tax system. In this regard, this report focused its analysis on the policy and revenue effects of the proposal. Although the bill was drafted based on the current economic situation, it is assessed as an overhaul that is not sufficiently aggressive in light of its initial intention, and its function as a financial source is expected to weaken. As a result, it fails to present any substantial elements of note, and does not align with overall directions to revamp tax expenditures.
First and foremost, the revenue effect of the government’s proposal, year-on–year, is estimated to be KRW 0.3 trillion, far below the average revenue effect of KRW 1.66 trillion in the bills from 2011 through 2015 which implies that its intended function of providing additional revenue is weak. Reconciling the policy role of tax and its function as a fiscal resource is more imperative than ever before, given the continuous deterioration of fiscal soundness due to the slow economic recovery and growing social expenditures.
Moreover, from the perspective of the people, frequent tax revisions and reforms undermine predictability, thus having a negative impact on economic activity. However, the bill this year seems to remain a passive revision rather than a structural reform, considering that the basic elements are small in scale and revenue effect and, at best, limited to adjusting the scope of application of existing policies or extending the expiry dates of sunset provisions without much notable change in content.
Analysis also points out that the bill runs counter to existing directions to revamp tax expenditures. Having set a decrease in tax expenditures (tax exemptions and reductions) as a framework for tax under the vision of “welfare without tax increases,” the incumbent administration has eliminated or adjusted some items subject to tax exemption or reduction and introduced an ex-ante evaluation and performance management schemes for tax expenditures over the past three years. However, the bill this year is expected to increase tax expenditures due to the expansion of items subject to tax credits or benefits to invigorate the economy and the extension of some sunset provisions to ensure secure livelihoods for the public.
This report, including deliberation on the administration’s 2016 Tax Revision Bill, suggests that now is the time to discuss fundamental tax reform, not a repetitive tax revision as an annual event, to respond to the mid- to long-term changes in the tax environment. Discussion should be focused both on how to enhance impartiality in sharing the tax burden and promote transparency in tax policies while respecting the principle of securing a reliable tax revenue.