“The government will examine tax benefits and exemptions, including the tax deduction for credit cards,” said Hong Nam-ki, the Minister of Economy and Finance (MOEF), on March 4. Since his remark, there have been strong arguments for and against the credit card tax deduction. However, it is expected that the current controversy will lead the society to set new goals.
The credit card tax deduction was enforced to legalize the standard of assessment of independent businessmen right after the International Monetary Fund (IMF) crisis. The Restriction of Special Taxation Act (RSTA) deducts 15 percent of one’s credit card bill which exceeds 25 percent of one’s gross salary. When it was first introduced, it was to be temporary. However, it has been extended for 17 years since its first sunset delay in 2002.
There are 30 tax benefits and exemptions that are stipulated to vanish this year, and the credit card tax deduction is one of them. MOEF released a basic plan of tax expenditure in 2019 and noted its intention to thoroughly check the validity of the impending sunset provisions for tax favors. It is an essential measure because the tax system must be fair and efficient. However, it is difficult to judge whether one is necessary or not.
Now the government stresses that the original purpose of the credit card tax deduction has been achieved. The Korea Institute of Public Finance (KIPF) revealed that the rate of assessing the income of independent businessmen increased from 62 percent in 2010 to 88 percent in 2016. Kim Dokyun, the director of policy analysis in Gyeonggi Research Institute (GRI), mentioned that, “the policy has lost its meaning in that it already achieved its goal of legalizing the standard of assessment.”
Professor Park Hun (Science in Taxation, University of Seoul) mentioned, “since deducting tax is not different from expending tax revenue, it is important to remove unnecessary exemptions.” In fact, the credit card tax deduction took about 1.8 trillion won from the national tax revenue in 2016.
This is the reason some experts emphasize the need to reconsider the policy itself.
Another concern is that highincome earners might receive more benefits from the policy. Professor Park said, “tax deduction is inevitably regressive because a high tax rate on large incomes means more deduction.” This implies that the policy might rather increase the gap between the rich and the poor, contrary to the purpose of the tax system. Indeed, the National Assembly Research Service (NARS) revealed that those in the top 20 percent of income ranked the highest in the amount of tax deduction.
On the other hand, salaried employees strongly resisted the government’s plan to abolish the law. The Korea Taxpayers’ Association (KTA) conducted a signature-collecting campaign to oppose reducing the credit card tax deduction. It pointed out that reducing the deduction is practically a tax boost, which is particularly aimed at the transparent wallets of salaried employees. They refer to the wallet as transparent because the rate of assessing their income is relatively high. Consequently, a three-year-long extension of the sunset provision was decided in a consultation between the government and the ruling party on March 13.
Plans for Sunrise After Sunset
Although the impending issue of making a decision is over, it is important to ponder on the ways to make up for the drawbacks of the policy when the time of sunset arrives. When looking at the big picture, the government c an t ake t wo ways regarding the tax system. It can implement a principle of minimizing tax imposition for welfare. On the other hand, it can focus on establishing a broad welfare system which requires increased tax imposition.
In the former principle of reducing tax, education and healthcare are mainly mentioned because they are necessary in one’s life. Some experts including Professor Park propose raising the deduction rate of tax credit for educational and medical expenses. Professor Park explained that this measure can offset the burden of people if the credit card tax deduction is abolished or reduced. It is also notable that the tax credit is fair to lowincome earners because it remits the amount of tax they need to pay.
Another measure on the same principle is to increase the deduction rate of other payment methods. It can drive people to use other methods and diversify the choices of consumers. The contrary stance regarding the credit card and other payment instruments is derived from their differences. In particular, compared to credit cards, cash and debit cards are relatively free from the issue of debt.
These supplementary actions to balance with existing tax favors have apparent merits. They can be a part of welfare that is expected to cancel out the shock of reduction or revocation of the credit card tax deduction. It is expected that they would unload the burden of both individuals and the government which is facing negative public opinion.
More Discussion Still Needed
However, there are concerns that these alternatives have limits. “In the longer term, a fundamental revolution is needed,” Kim said. The point of his argument is that the tax and welfare system has been distorted due to excessive exemptions. In 2016, Korean income tax revenue was 4.6 percent of gross domestic product (GDP), far lower than 8.4 percent—the average of the Org anis ation for Economic Co-operation and Development (OECD).
Although the low taxes have been of help, some stress that the change in social atmosphere is quite notable. Nowadays, Korean society has been actively discussing the establishment of a substantial welfare system. For example, the government is currently making arrangements to push ahead free education for high school students. “This tendency implies that it might be the time to publicly talk about increasing tax," Kim mentioned.
As the tax system is highly complicated, there is a sharp conflict of interest regarding the credit card tax deduction. It is also difficult to find the best alternative among the varying or opposing opinions. However, every member of society needs to participate in the discussion in order to break the status quo. There is a limited time of three years until the sunset of the provision comes.