NABO Estimates & Tax Issues (Issue 15)
Published on 28 May 2021
Published by Estimates and Tax Coordination Division of the Estimates and Tax Analysis Office
I. Estimations & Taxation Trends
· Among the 242 legislative bills approved in the first quarter of 2021, 84 (34.7%) have an impact on the finances of national and municipal governments. Regarding 28 bills of which an estimation can be made, enforcement of the bills is expected to result in an annual decrease of 13.6 billion Korean won in revenue and an increase of 575.8 billion won in expenditure on average, over the next five years (2021-2025).
· The cumulative revenues in the first quarter of 2021 totaled 152.1 trillion won, 32.6 trillion won (27.3%) higher than in the same period of the previous year (119.5 trillion won). This is mainly due to the strong performance in terms of property-related tax items including transfer income tax, securities trading tax and inheritance and gift tax; the Bank of Korea‘s surplus from its settlement of tax revenue payment accounts; as well as investment returns from the National Pension Service.
Ⅱ. Estimations & Taxation Analyses
· (Real estate disclosed price status and issues) The disclosed price system is a scheme through which the government conducts a survey and evaluation on appropriate real estate prices and publishes the results on January 1st every year. Such data is utilized in a variety of ways, such as for setting the tax base of the general real estate tax. Regarding the disclosed price system, there are issues in terms of the general real estate tax scheme such as the rationality of the disclosed price as the property tax base, the policy utilization of fair market value, as well as the relationship between the disclosed price realization plan and the equality of tax burden principle. In terms of the operation of the real estate disclosed price system, there are underlying issues regarding the calculation, evaluation, deliberation and verification of the disclosed price; as well as on applying the disclosed price to non-residential buildings.
· (Forecast and factor analysis of the 2021 general real estate tax) Factors that affect the general real estate tax of 2021 consist of the disclosed price increase factor and factors that modify the general real estate tax and property tax system. The general real estate tax for 2021 is forecasted to increase to 10.5-12.0 trillion Korean won, according to a scenario in which there will be fewer taxpayers subject to a general real estate tax following a rise in the disclosed price. When the factors are broken down, the tax burden appears to increase more from changes in the tax system than from the increases in disclosed prices. The relative size varied depending on the type of taxpayer and range of tax base. In addition, although the increased property tax revenues appeared to come from homeowners of at least three real estate properties and corporate-owned property rather than individuals owning one or two properties according to government policy, the property tax burden has also increased among homeowners owning one or two properties. As a consequence, relevant discussions are expected to be held in the future.
· (Analysis of the Korean tax expenditure management system) As a means to manage tax expenditures in Korea, there is a Tax Expenditure Budget Report, a tax reduction rate cap system and a tax expenditure performance management system. Regarding the Tax Expenditure Budget Report, the margin of error between the subsequent year‘s tax expenditure forecast and actual figure should be narrowed to enhance the accuracy of estimation; and the tax reduction rate cap system requires institutional improvement toward the goal of actually contributing to limiting tax cuts. Also, considering the rationale for introducing the Special Taxation In-depth Evaluation System, in-depth evaluation should be actively conducted such as by lowering the tax exemption and reduction rates when revising tax laws, as well as reinforcing analysis of “target completion level“, an essential evaluation category.
Ⅲ. Estimations & Current Tax Issues
· (Discussion trend on carbon tax) As of May 2020, 25 countries have implemented a carbon tax system. Some countries (Finland, Sweden, Denmark, Japan) have introduced a direct tax cut upon the introduction of a carbon tax as well as a carbon tax reduction in terms of industrial use; whereas others (Australia, France) have either abolished the carbon tax scheme or decreed a grace period for its enforcement due to the rise of opposition by taxpayers about introducing a carbon tax and increasing tax rates.
· (Cases of increasing the eligibility range for unemployment insurance in major economies) There is an ongoing trend towards reinforcing the social safety net for employees whose line of work is classified as both self-employment and wage worker. By means of amending the Employment Insurance Act, Korea plans to apply employment insurance for labor service providers on a mandatory basis. In this context, Italy and France have extended the eligibility for unemployment insurance to self-employed persons, while Denmark has strengthened coverage for the self-employed.
· (Medium-term fiscal projection trend in major economies: the US CBO) A report on fiscal and economic forecasts by the US Congressional Budget Office published an economic forecast from 2021 to 2031 by incorporating economic conditions up to January 12th, 2021 as well as legislation enacted up to this period, based on which a medium-term fiscal forecast has been made. Powered by the widespread distribution of vaccines against COVID-19 and relaxed social distancing measures, the US economy is expected to return to pre-COVID-19 levels from 2021. In fiscal terms, federal debt-to-GDP is expected to rise from 100.1% to 107.2% by 2031.
· (Public pension reform case in major economies: Japan) In order to address the sustainability issue of the Korean public pension system, it is necessary to examine the pension reform case studies of advanced economies that have already experienced similar issues. This issue highlights Japan‘s numerous pension reforms that have been undertaken throughout the process of operating its public pension scheme since 1942. Japan fixed its insurance premium, introduced an auto-adjustment tool which automatically adjusts the payment level depending on wages and inflation, and unified the public employee pension system – which is equivalent to Korea’s occupational pension - into a comprehensive public pension system.
Ⅳ. Tax and Fiscal Indicators at a Glance
This section consists of charts and tables visualizing tax and fiscal indicators including total expenditures and total revenues; a timeline of fiscal balance; national tax revenues, non-tax revenues, the public’s burden ratio, tax burden ratio, income tax ratio, corporate tax ratio and value-added tax ratio.