Analysis of the 2017 Tax Expenditure Proposal
October 24, 2016
Revenue Estimates Division II of the Economic Analysis Office
This report analyzes and comprehensively assesses the administration’s “2017 Tax Expenditure Proposal”, focusing on implementation of the tax expenditure management and evaluation scheme from a budget perspective.
According to the 2017 Tax Expenditure Proposal, the scale of national tax expenditures is projected to grow from KRW 36.5 trillion in 2016 to KRW 37.0 trillion in 2017 with the ratio of high-income earners rising (21.8%→22.1%), along with low- to middle-income earners (44.3%→45.2%). Although the increase is centered on low- to middle-income earners and SMEs to keep up with the growing demand for social welfare due to weak economic recovery and demographic changes, there seems to be a need to review the equity aspect related to increased benefits for high-income earners. In addition, some populations such as the elderly, regardless of their income level, are classified as mid- to low-income earners in the proposal, which implies a potential underestimation of benefits for high-income earners. Therefore, it is advisable to improve the classification system of beneficiary populations and disclose related tax expenditure items. In addition, the administration estimates in its proposal that the amount saved through overhauling efforts on tax expenditures in 2016 would be KRW 96 billion (2017-2021), a mere one-tenth of the average KRW 1.1893 trillion from 2012 through 2015, and revenue is estimated to decline KRW 245.4 billion in total should the expanded revision proposal be included in tax expenditures.
Analysis also points out that the classification system in the proposal needs to be aligned with areas subject to policy support, thereby identifying the progress of tax expenditures for each area and designing a comprehensive mechanism with “assessment by policy group.” Tax expenditures for items without sunset provisions, which turn out to have been in operation for a long time, account for 59.2% of total tax exemptions as of 2017, necessitating the adoption of sunset provisions on such items to promote systematic management. Moreover, the ex-post management of tax exemptions requires more effort toward developing operational guidelines and collecting performance data. With respect to local tax exemptions and deductions, management of progress should be toughened to the level of the national tax expenditure proposal.
The administration conducted an assessment, following the first of its kind in 2015, on eight tax expenditure items—two new items, each of which is estimated to offer KRW 30 billion or more in tax exemptions each year, as well as six others with expiry dates arriving at the end of 2016. Based on the findings of this assessment, the administration included the six items (three reductions; one expansion of beneficiaries; and two simple extensions), not the two new ones, in its Tax Revision Proposal with a plan to extend their expiry dates. However, the proposal seems to remain a passive overhaul as some items, questionable in their validity or effectiveness, were also recommended for extension. Therefore, related measures need to be improved through establishment of comprehensive and objective standards for cases when assessment findings differ by sector and application of a principled approach to abolish tax exemptions and deductions for those items questionable in terms of validity or effectiveness.