Is Han Dong-hoon’s pledge to ‘cut VAT by half’ effective?

With high inflation emerging as an issue in the April 10 general elections, People Power Party Emergency Response Committee Chairman Han Dong-hoon made an unprecedented pledge to temporarily ‘cut the value-added tax by half’. The plan is to lower the value-added tax from 10% to 5% only in areas that are closely related to the lives of ordinary people, such as processed foods. Although there have been policies to reduce the tax burden on certain items, such as lowering the individual consumption tax on automobiles, it is unusual to uniformly reduce value-added tax on multiple essential consumer goods. Experts point out that since the VAT cut applies to everyone regardless of income, it is difficult for vulnerable groups who really need help to benefit more, and it can also cause problems with financial soundness, so a cautious approach is needed.

At a general election campaign held at Hoegi Station in Dongdaemun-gu, Seoul on the 28th, Chairman Han said, “Yesterday, the government held a public livelihood inspection meeting and announced several good policies for citizens suffering from high inflation,” adding, “But in our view, that alone is not enough.” He said. Chairman Han continued, “That is why we strongly request some additional measures from the government, and we expect that the government will also review them positively.”

Chairman Han also said, “We strongly urge the government to temporarily cut the value-added tax by half from 10% to 5% for areas closely related to the lives of ordinary people, such as maternity and child care products, processed foods such as ramen, instant rice, and canned food, and food ingredients such as sugar and flour. “We have requested it,” he said, adding, “If necessary, we will also push for revision of the law.” If Chairman Han’s proposal to temporarily reduce value-added tax becomes a reality, for example, processed foods that were sold for 11,000 won (including 1,000 won in value-added tax) will be available for 10,500 won (500 won in value-added tax).

The reason why Chairman Han made an unprecedented pledge to reduce the value-added tax is because the burden on the vulnerable class has increased due to the accumulated high prices and the public’s view of prices is unusual due to the controversy over President Yoon Seok-yeol’s ‘875 won per green onion’ comment. According to the household trend survey for the fourth quarter of last year released by Statistics Korea, consumer spending in the first quintile (bottom 20% of income) decreased by 1.6%, while all other quintiles increased. In other words, the burden of high prices has reduced consumption in the low-income group more than in the high-income group.

However, skepticism is raised as to whether the unusual measure of cutting VAT by half is an effective price stabilization measure. VAT is a general consumption tax that is taxable on all goods and services and is levied at 10% regardless of income. For this reason, if the value-added tax is lowered, high-income earners with relatively large consumption expenditures will benefit. Kim Woo-cheol, a professor of taxation at the University of Seoul, said, “It is positive that politicians have come up with policies to directly shoulder the burden of livelihood for the common people,” but added, “The value-added tax cut does not only apply to the few who are having trouble making a living. “The financial cost is significant, and vulnerable groups will benefit only a portion of the cost, while the rest will mainly benefit,” he said. Professor Kim continued, “Even if the value-added tax is lowered, the actual price reduction effect may not be significant,” and added, “It is right to directly select and support vulnerable groups by providing in-kind items such as coupons or small subsidies.”

There are also voices of concern about financial soundness. Although Chairman Han announced a temporary reduction policy for some items, value-added tax is one of the three major items of our national tax revenue. Last year’s national tax revenue was 344.1 trillion won, but value-added tax was 73.8 trillion won, the second largest after income tax (115.8 trillion won) and corporate tax (80.4 trillion won). Heo Jin-wook, a professor of economics at Incheon National University, said, “A VAT cut may reduce the price burden in the short term, but if the value-added tax (for relevant items) is not small, it will be a burden on fiscal soundness.” He added, “It is true that prices are high and domestic demand is poor, but this is an exception. “It is not a situation where prices have suddenly risen enough to require action,” he pointed out.

Sejong = Reporter Lee Hee-kyung [email protected]

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