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Negligible effects

Publication Date : 12-09-2012

 

Korean administration has come up with cosmetic tax cuts and other supposedly stimulus measures to prop up the sagging economy. By taking these measures, it apparently hopes to show the ruling party that it has done what little it can.

Under pressure from the Saenuri Party to give the listless economy a shot in the arm, the administration has decided to halve tax rates on the acquisition of homes until year-end -- to 1 per cent on homes priced 900 million won (US$798,842) or less and 2 per cent on the amount in excess of 900 million won. It has also decided to waive the capital gains tax on homes purchased this year for the next five years.

But few would believe that these temporary tax cuts will revive the moribund property market. Not many households, lured by a saving of 5 million won, would take the plunge and decide to purchase a 500 million won home. Nor would the temporary exemption of capital gains taxes be a strong incentive for home purchases, given the low expectations that home prices will rebound anytime soon.

The lowering of excise taxes on passenger cars and home appliances by 1.5 percentage points would also have a limited effect on consumer spending at best, as the tax cuts for property transactions do.

Even more ludicrous is the administration’s decision to reverse the way it collects individual income taxes. The administration has been withholding larger amounts of money than necessary each month for sizable tax refunds the next year. Now the administration has decided to reduce the amounts withheld each month for smaller tax refunds.

The change in tax collection is little different from the proverbial trick of appeasing an ape, unhappy with getting three bananas in the morning and four in the evening, with a promise to give him four in the morning and three in the evening.

According to an estimate by the administration, all the tax cuts and tricks will have the effect of 4.6 trillion won in fiscal support this year and an additional 1.3 trillion won next year. The administration says they will raise gross domestic product by a miniscule 0.06 percentage point this year and another 0.1 percentage point next year.

The stopgap measures were not worth the administration’s efforts, though it might be understandable if it took them simply because it could not ignore the ruling party’s demand for a stimulus package.

US$1 = 1126.63 South Korean won

 

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