South Korea's top economic policymaker said Tuesday that the government will keep a no-tax- increase policy despite growing criticism that it took a turn into hiking taxes especially on people in the low-income bracket.
Right after the three-day Chuseok holiday, the Park Geun-hye administration announced a plan Thursday to raise an average cigarette price by 80 percent to 4,500 won (4.34 U.S. dollars) from Jan. 1, 2015. It had yet to receive a parliamentary approval.
A day later, the government said it will lift taxes on residents and commercial vehicles, which would increase tax-paying burden on ordinary people along with the cigarette tax hike.
"It would be misleading to say that South Korea switched into a tax-raising policy," Finance Minister Choi Kyung-hwan told foreign correspondents in central Seoul. He said the cigarette price would be raised to enhance public health, adding the local tax increases, such as the resident and commercial vehicle taxes, would come in response to strong request from local governments struggling with high deficits.
The tax hike was under strong criticism as the three taxes belong to an indirect tax, which imposes the same tax rate on people, poor or rich, and put greater tax burden on the poor.
For instance, a man who smokes a pack of cigarette per day would be required to pay 1.29 million won (1,244 U.S. dollars) of taxes annually after the tobacco price hike, more than doubling from 560,000 won in taxes presently imposed on cigarettes, according to estimates by Rep. Park Wonsuk of the minority opposition Justice Party.
It will not be a big ticket for high-income earners, but it will be burdensome for people who earn 1-2 million won per month and belong to the low-income bracket.
A variety of taxes are imposed on cigarettes, including consumption tax, provincial education tax, added-value tax and contributions to enhance public health which generate 2.8 trillion won, 1.4 trillion won, 1 trillion won and 1.6 trillion won each per year in tax revenue. Those taxes account for more than 60 percent of the cigarette price now.
As is well known, a price hike reduces the smoking rate, but critics insist the effect would be temporary as seen in the country's 2004 hike in cigarette prices by 500 won. Some reports said the past hike lowered the smoking rate among the rich rather than the poor.
As regards rising demand for a direct-tax hike, Choi said the income tax was already raised under the current and previous governments, noting the corporate tax would not be lifted as the tax increase can cause a foreign capital outflow.
The income and corporate taxes, which took up almost half of the country's tax revenue in the first half, belong to a progress tax that imposes a higher rate on those who earn more money and make more profits.
Instead of launching discussions on whether to raise the direct taxes, South Korea picked a hike on indirect taxes such as taxes on residents and commercial vehicles that would raise tax-paying burden for low-income earners. It would be lifted under the pretext of helping provincial governments reduce deficits.
Some local media attributed the indirect-tax hikes, which mainly cause resistance from the poor, to a no-election period for almost two years. After the July 30 by-election, there will be no nationwide election in South Korea till April 2016 when a general election is scheduled to be held.
A local newspaper Seoul Shinmun claimed Monday that positions of the ruling party and President Park Geun-hye were completely reversed from no tax hike against ordinary people used as one of catchphrases during the 2012 presidential election and general election.