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Major advanced countries are making all-out efforts to trim taxes and curtail government spending. We alone are running in the opposite direction. With excessive taxes and wasteful budgets, our republic cannot become an advanced country. Unless we establish a smaller government and a market-led economy, we can hardly survive in the globalized era of the 21st century characterized by limitless competition.
Tax burden rates against gross domestic product of the Organization for Economic Cooperation and Development countries in the past four years fell 0.7 percentage points on average, and government expenditure declined 0.4 percentage points. As a result of such efforts, the OECD's state debts against GDP rose only 6.6 percentage points on average. In contrast, our tax burden rate in the same period under the Roh Moo-hyun government rose 1.2 percentage points and government expenditure increased 3.5 percentage points. As a consequence, the government is straddled with chronic financial deficits and dramatically increased state debts. State debts against GDP during the same period rose as much as 13.9 percentage points.
The government, obstinately cranking up spending, absurdly compares our economy to advanced welfare countries whose per capita income is more than three times ours. "Since our tax burden and state debts are lower than those of advanced welfare countries, there is nothing to worry about," says the government. Social welfare expenditures snowballed 12.1 percent per annum on average in the past seven years, higher than the average budget increase rate of 8.5 percent. Wasteful mammoth state projects, projected to cost more than W200 trillion (US$1=W931) in the next 10 years, were launched under the name of "balanced national development."
Advanced countries are making desperate efforts to cut chronic deficits and state debts. It's tragic for a country that should be growing in full swing to imitate Western countries that developed decades ago and are now troubled by a wrong financial model. Our public finance is already seriously sick. The tax revenue increase rate is falling due to declining growth potential. On the other hand, demands for government spending -- from rising public aspirations for an improved quality of life, the increasing proportion of the old, and the low birth rate -- rise faster than the tax revenue increase rate.
If the current trends continue, welfare expenditures against GDP are projected to skyrocket to 20.6 percent in or around 2030 from 8.3 percent in 2005. Loose finance and taxation management, characterized by skyrocketing financial expenditure unrelated to improved national competitiveness, like the move of the capital, balanced national development, support for rural areas, relocation of the U.S. bases and independent defense, and a consequent rising tax burden to meet them will depress our economic vitality and hobble any leap forward toward becoming an advanced country.
Our tax burden rate of 19.5 percent in 2004 was lower than that of European welfare nations, but higher than that of the U.S. (18.8 percent), Japan (16.5 percent) and our Asian rivals. Tax increases under unfavorable investment conditions such as high land prices and wages plus an unstable labor market will prompt a departure from the country of capital and brains. To heighten our national competitiveness, we must reduce the tax burden, and to that end, make endeavors to drastically trim wasteful, unnecessary and unimportant government spending.
This column was contributed by Kwack Tae-won, a professor of economics at Sogang University.
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