firmly in place has been confirmed through an abundance of historical evidence.
Earned Income Tax Credit, Will It Work?
The government has announced the introduction of an Earned Income Tax Credit (EITC) to give financial support to the second lowest bracket of citizens who can't escape from poverty despite their hard work. EITC is a system that provides cash to a household with the annual income of a couple not exceeding 17 million won (1.2 times as much as the minimum cost of living). When a person reports his global income tax in May, a tax imposed on him is deducted from EITC (up to W800,000 in its early stages) and the remaining tax credit is given to him in cash.
At present, similar systems are operated in 6 developed countries including the U.S. and Britain as a measure to raise people's motivation to work and narrow the poverty gap. Despite the laudable motives, the system does not fit our circumstances.
Above all, those countries with EITC have introduced tools to prevent people from relying on their welfare system rather than looking for a job. Studies on the system, however, have given rise to questions about whether EITC can encourage people to work. Though some single-parent families proved to supply more labor after EITC was enacted, a married woman with a husband provided less labor. In addition, single-parent families in Korea account for only 6.4% but 15% in America, indicating that the effects from EITC would be much smaller. Moreover, low-income people in Korea are poor not because they are lazy but because they can't find a job, as middle-income jobs are scarce. So the backgrounds of its introduction into Korea is much different than those of the West.
Second, in order for EITC to have success, the government should figure out exactly who belongs to the second lowest bracket and how much they earn. Nevertheless, now 4.15 million (28%) out of a total 14.89 million workers are temporary employees and their income is not fully known. Though the government knows the income of 4.36-million self-employed people out of 4.99 million, the number of those who keep a book to report income is only 1.14 million, and it is estimated that only 50% of the income of the self-employed is known to the government. Additionally, no progress has been made to find out the accurate incomes of farmers and fishermen. In conclusion, the income of most of the population which would benefit from the system is not known.
Back in 1999, when the National Pension Fund was extended to more people, the government said "the extension would help to figure out people's income", but no significant enhancement has been made so far. The hard work of the National Tax Service alone can not make immediate changes.
Since this year, a self-employed individual hiring at least one employee has been told to submit a pay sheet, and for a company, it must supply payroll information about its temporary workers. However, an employer submitting such documents must shoulder additional costs arising from 4 obligatory insurances (8.1% of the pay) and then a low-wage employee must accept a decrease in his pay by 7%. The employer would rather bear 2% additional taxes than submit a payroll, so the system doesn't seem to be practical. Enactment of EITC without tangible success in estimating people's incomes could be another failure of policy stemming from reckless attempts of politicians to win popularity.
Third, given the lack of the government's ability to estimate income, the system would be applied first to wage earners whose income is known, but this is against the principle of equality. In general, those people have a stable job that guarantees more income compared to temporary and irregular workers. And these low-income people can't benefit from EITC because the government cannot estimate their income.
Fourth, the government plans to expend W150,000 million in the beginning and W2,500 billion in the long run to enforce EITC. In the U.S., however, the amount of EITC has increased 30 times during 30 years and the number of applicants 3.4 times. Once the system is implemented, politicians can't help but extend money to more people due to their desire to gain popularity. In turn, this would impose a burden on the national budget, eventually leading to tax increases. This is the reason why welfare systems should be introduced with much care.
More recently, the general manager of the Ministry of Finance and Economy has said that there would be no burden on people when raising funds for EITC, arguing that the additional revenue from earned income tax would amount to almost W1,000 billion a year due to expected economic growth.
Yet, will the government be able to attain economic growth they desire? The Participatory Government has set a goal of growth as 5% a year but has hardly achieved it so far. Moreover, once the new system becomes effective, it can't be easily cancelled and, if economic growth is slow, people will have no choice but to bear the burden. If the economic development is achieved as they predicted, the government can spend the money in executing existing welfare policy. It is not wise to enforce a new system grounded on a future goal of which the outcome is uncertain.
Fifth, the relation between EITC and the system of providing the minimum cost
of living is not clear. Indeed, EITC is not fundamentally different from the
existing system. Thus, enforcement of EITC would weaken the current system for
ensuring the minimum cost of living.
Finally, there could be abuse of EITC. In the U.S., it is estimated that more than 30% of applicants are not eligible for the tax credit. Considering the government's poor ability to estimate income, there could be more people who abuse the system in a dishonest way and more administrative costs would be necessary.
It is understandable that politicians are eager to come up with a seemingly good welfare system before the next elections. If EITC is enacted right now, however, an enormous amount of taxes will be wasted instead of accomplishing the goal of relieving poverty.
Kim, Suntaek (Chairman of Korea Taxpayer's Association)