Monday, December 27, 2010

Korea Should Tax Soju to Fund the NPF

The Seoul Gyopo Guide Thanks Everyone for Their Support
First, a huge "thank you" to the readers around the world.  In three short months, many thousands of visitors from every continent, and over 60 countries around the world have visited the Seoul Gyopo Guide.  The Lost Seoul has tried to share its perspective from both a foreigner's and a Korean's point of view.  These points of view have been established by many years of education and practical experience.  The bottom line is that people around the world don't know much about South Korea, and are totally unaware that a city like Seoul has grown into the world's 5th largest metropolis.  While the views of The Lost Seoul are hardly unbiased, they are views which are being offered as fairly as possible.

Korea Needs to Avoid the Japanese and U.S. Example

It is a well-known fact that the National Pension Fund of Korea faces many challenges.  Investment returns have been, overall, more than acceptable.  The National Pension Fund is a well-respected investor around the world.  Nevertheless, the demographic fact is that the average age of a Korean residing in Korea is increasing.  As a result the needs of the elderly will increase through time.  There are other countries around the world where this is an issue.  The U.S. and Japan are two prime examples.  It can easily be said that one of Japan's largest problems is that the aging population is restricting economic growth, and its future indebtedness will only grow, and potentially result in a third "lost decade," when there is limited economic growth, and limited asset price growth.  In the U.S., the Social Security system is in tatters.  While much of this may be the result of the lower tax receipts as a result of a stagnant economy, the underlying fact is this:  in the past there were 8 payors into the Social Security system for every recipient of benefits, and today that number is...3.  Korea is smaller and cannot withstand these shocks.  Various attempts to increase the birth rate have failed, to put it mildly.  In 2009, Korea had the world's lowest birthrate.   Let's put aside the other problems this causes, such as no future demand for real estate, and lack of people to populate the army.  The biggest problem of this low birthrate is that personal income taxes collected by the government will inevitably decline.  That is a certainty unless tax rates increase by an amount to compensate for the loss of payors.

Tax Soju Directly, and Remit the Funds to the National Pension Fund Directly  

Soju is the national alcoholic drink of Korea.  The Seoul Gyopo Guide proposes a 200 KRW tax on every bottle of soju, and that every won is sent to the NPF directly.  A bottle of soju at 7-Eleven or GS24 costs 1,100 KRW.  That is less than USD $1.  Now, we could enter into a whole discussion about how consumer goods are strangely priced in Korea, but don't get me started (a phrase that The Lost Seoul has taught in a previous "Slang of the Day.")  Let's just stop at a couple of examples:  a bottle of Coca-Cola, or orange juice, and a bottle of water are all (or can be) more expensive than a bottle of soju.  Drinking is a well-known problem in Korea.  In fact, there is a even a weblog dedicated to displaying drunk, passed-out Koreans on the street.  A 200KRW tax can then serve two purposes.  First, it can be used to discourage excessive drinking.  Second, it can also be used to finance the impending stress on the National Pension. 

The Potential Objections No Longer Apply

This tax has been proposed in the past.  During the Korea-IMF crisis (known in Korea as IMF 시대), a similar proposal was suggested to fund South Korea's debt to the International Monetary Fund.  At that time, there were many, many makeshift food stands on the road (포장마차) where unemployed men and women would basically sell food in temporary restaurants.  Jinro, the largest soju brand in Korea at the time, went bankrupt (it has now been re-established).  There were complaints that soju was the one of the only respites from the economic turmoil in Korea.  In addition, there was the notion that men and their sons shared soju as a rite of sorts, a tradition between men and their sons which would be jeopardized as a result of this tax.  Well, times have changed, and the prices of essentially every other beverage in Korea has continued to rise, with the exception of soju. If we need a bottle of soju, then KRW200 is a small price to pay.

In the U.S., taxes (and tobacco such as cigarettes) is a called a sin tax.  That is, if you want to drink or smoke, then you are charged for it.  In the U.S. a pack of cigarettes is at least $5.50, or over KRW6000 (and don't ask Manhattanites how much a pack costs).  In Korea, a pack of cigarettes is KRW2500.  A KRW200 tax to fund the NPF is not only justifiable, but it goes to solve an inevitable, long-term problem.

A very important aspect of this proposal is the direct remission of all receipts to the National Pension Fund.  This avoids pointless political wrangling.  Usually, when there are budgetary changes, there is a lot of wasteful, politically-driven debate about where the funds would be used.  A direct deposit to the NPF would avoid all of that.  Politicians that object would be easily identifiable to be those against a proposal that would unequivocally help Korea in the long run.  In other words, if Koreans wanted to know who to vote out of office, this could easily be determined.  While identifying selfish politicians is not the main objective of this proposal, it would be a welcome, needed side effect.   

Things Change, and Korea Must Adjust

The demographic dynamics can change, but the benefits of a tax on every bottle of soju would remain.  The birthrate of Korea could increase.  Koreans may stop drinking (doubtful).  A higher corporate tax rate might result in massive over-funding off the NPF.  The Lost Seoul highly doubts that any of these will occur.  It is potentially the case that a tax on every bottle of soju sold will result in a great deal of revenue to be remitted to the NPF.  That would only result in positive side effects.  For example, if there were a large surplus, then the NPF could increase disbursements to aid aimed at the poor and homeless.  It could invest in infrastructure projects to reduce Korea's dependence on foreign sources of energy.  The elephant in the room is the need to plan for a much, much larger, non tax-paying population, if North and South Korea were suddenly united once again.  In short, a 200KRW tax on every bottle of soju would help solve inevitable long-term issues, and potentially help if certain, sudden events occurred in the short run.

The concept of a "sin tax" is common, and in this case, Korea can learn from other nations.  There are other examples where Korea can follow positive examples to upgrade its practices and laws.  For example, the Seoul Gyopo Guide will begin, in 2011, a new series to focus on Korea's backwardness with respect to international Family Law, as evidenced by Korea's non-participation in the Hague Convention on International Child Abduction.  As Korea's economy advances well into the world's highest echelon, its social and legal structure must meet the responsibilities that accompany that progress.


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