Analysis of the 2019 Notes on Tax Expenditure Budget
Published on 6 November 2018
Published by Property & Consumption Tax Analysis Division of the Estimates & Tax Analysis Department
Through the 2019 Notes on Tax Expenditure Budget, this report takes stock of the status of tax expenditures in 2018 and examines the characteristics of the tax expenditure management direction set by the government, which aims to actively utilize tax expenditures to overcome recent economic conditions. In addition, this report examines the changing trends and key characteristics of tax expenditures by each budget category, along with analyses of major special tax items such as the earned income tax credit (EITC) and credit card income tax deduction.
According to the 2019 Notes on Tax Expenditure Budget, the volume of tax expenditures related to tax exemptions and tax breaks that are managed under the Notes on Tax Expenditure Budget totaled 39.7 trillion won in 2017, an increase of 2.3 trillion won from 37.4 trillion won in 2016; whereas the figures in 2018 and 2019 are estimated at 41.9 trillion and 47.4 trillion won, respectively. The average annual growth rate of tax expenditures by time period is 4.9% between 2014 and 2017, whereas the figure is 4.9% between 2017 and 2019, implying that the expenditure volume is likely to increase by a higher rate from 2017 compared to the period before 2017. The tax reduction rate in 2019 is estimated at 13.7%, up 0.7%p from 13.0% in 2017, which is only 0.1%p below the stipulated ceiling of 13.8%. This is due to the significant expansion of taxation through measures such as the labor encouragement tax, in accordance with the tax expenditure management direction of the government which intends to actively utilize tax expenditures. Therefore, there is concern about heightened restrictions on the government’s tax expenditure management process while at the same time striving to observe the tax reduction rate ceiling as stipulated in the National Finance Act.
Meanwhile, there are a total of 68 tax expenditure items that were adjusted in 2018 (7 new/43 expanded, 11 discarded /7 reduced), and when incorporating the expansions omitted by the government such as the EITC, the consequent tax income is estimated at –4 trillion 204 billion won. The evaluation and adjustment of the 2018 tax expenditure items appear to be inadequate compared to those of previous years. Although the government estimated the tax expenditure increase rates following the proposed expansion of the EITC and child incentive tax credit to be 3.5 trillion and 0.4 trillion won annually, respectively, they were excluded from the evaluation. It is difficult to systematically manage these tax credit programs due to their lack of a sunset clause and because it will not be easy to scale them down in the future. Therefore, even though there is a clause about evaluation exceptions for economic or social circumstances, these tax credit programs require advance assessments of their effectiveness etc. Also, 55 (24.7%) items “subject to active control“—which is a tax expenditure category targeted by the government for intensive adjusted—have no sunset clause, and require improvement since their management effectiveness is inadequate as proven by the nearly 8.4 trillion won (42.0%, as of 2019) tax reduction.