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Assessment of These Programs: Effects and Costs

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Assessment of These Programs: Effects and Costs06



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Title Assessment of These Programs: Effects and Costs
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Material Type Reports
Date 2015
Language Korean
File Type Theme
Subject Economy < Economic Administration
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Abstract

Sub-Theme 3 | Assessment of These Programs: Effects and Costs




 


Growth of Credit Card Spending

 


After the Credit Card Income Deduction Program was put into effect, the credit card spending amount by the private sector has greatly increased. The amount was only USD 530 million in 1998 just before the program started. However, it amounted to USD 115 billion in 2000 which was one year after the program was implemented. This indicates a 216-time increase in credit card spending in Korea over just 2 years. Table 1 also shows that the percentage of credit card spending out of total domestic private consumption expenditure  also considerably increased from 0.24% in 1998 to 40.34% in 2000. 


 


Table 1. Credit card Spending Amount and Percentage of Credit Card Usage out of Total Domestic Private Consumption Expenditure 


(Unit: billion USD)


Year 1998 1999 2000 2001 2002 2003 2004


Amount 0.53 36 115 129 213 200 192


Percentage 0.24 14.22 40.34 41.15 60.33 55.26 51.08


Sources: Bank of Korea, Credit Finance Association of Korea.


Note: The exchange rate of USD 1=₩1,200 is applied.


 


Figure 1 displays graphically how fast credit card usage grew in Korea before and after the program. Even taking into account other factors that affected this pronounced growth of credit card spending for these time periods, it is undeniable that the Credit Card Income Deduction Program was one of the main driving forces of this phenomena.




Figure 1. Credit card Spending Amount & Percentage of Credit Card out of Total Domestic Privative Consumption Expenditure


Sources: Bank of Korea, Credit Finance Association of Korea. 


Notes: 1. Left-hand scale is amount (in billion USD) and right-hand scale is percentage (%).


2. The exchange rate of USD 1=₩1,200 is applied.


 


 


Growth of Cash Receipt System

 


The Cash Receipt System has settled down well in Korea. In the first year the Cash Receipt System was introduced, more than one million merchants registered as cash receipt issuers. As Figure 2 shows, the number of registered stores has steadily increased since then. Almost 3 million merchants were cash receipt issuers as of 2014. 


 


Table 2. Number of Registered Cash Receipt System Merchants 


(Unit: 1,000 merchants)


Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Number 1,144 1,401 1,725 1,918 2,118 2,290 2,398 2,465 2,703 2,827


Source: National Tax Service.


Note: The exchange rate of USD 1=₩1,200 is applied.


 


Figure 2. Number of Registered Cash Receipt System Merchants


(Unit: 1,000 merchants)


 Source: National Tax Service.


Note: The exchange rate of USD 1=₩1,200 is applied.


 


Table 3 and Figure 3 show that cash receipt issues and amounts have significantly augmented over the 10 years of Cash Receipt System implementation. The number of issues in 2005 was 45 million, growing 12-fold by 2014. In particular rapid growth can be seen for the first 5 years. Along the same lines, the cash receipt amount grew from 15.5 billion USD in 2005 to 76.6 billion USD in 2014.


 


Table 3. Cash Receipt Issuances and Amounts


(Unit: 1,000,000 issuances, billion USD) 


Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Issuance 45 74 149 289 444 495 519 526 523 519


Amount 16 26 42 51 57 63 67 68 71 77


Source: National Tax Service.


Note: The exchange rate of USD 1=₩1,200 is applied.




Figure 3. Number of Cash Receipt Issuances and Amount


(Unit: 1,000,000 issues, billion USD)


Source: National Tax Service


Note: 1. Left-hand scale is number of million issuances and right-hand scale is amount (in billion USD).


2. The exchange rate of USD 1=₩1,200 is applied.




 


Tax Base Expansion Effect

 


It is fair to say that many undetected transactions have been disclosed due to the Credit Card Income Deduction Program and Cash Receipt System. Then, how much of the underground economy has been legalized by these programs? This is a difficult question to answer because the credit card spending and the cash receipt practice are affected by other factors such as economic growth and changes in consumption patterns. 


Nonetheless, some studies have tried to answer this question. According to Ahn et al. (2010),  if the ratio of the sum of the credit card spending amount and the cash receipt amount to GDP increases by 1%, the size of the underground economy compared to GDP decreases by 0.13%. This magnitude of the effect can be evaluated as considerably significant. 




 


Cost

 


The Credit Card Income Deduction Program and Cash Receipt System provide some tax benefits to consumers and business owners. This means that the government has to sacrifice some tax revenues in response to legalizing the underground economy. Table 4 shows the foregone personal income tax revenues the Korean government has relinquished because of these programs since 2005. On average more than USD 1 billion income tax review is forgone every year.


 


Table 4. Forgone Income Tax due to Credit Card Income Deduction and Cash Receipt System


(Unit: million USD) 


Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Amount 818 872 1,042 1,264 1,578 1,534 977 975 1,143 1,309


Source: Ministry of Finance, Korea.


Note: The exchange rate of USD 1=₩1,200 is applied.


 


Moreover, cash receipt registered stores and cash receipt operators are eligible for Value Added Tax credit through the Cash Receipt System. The National Tax Service reports that total tax credits are annually USD 80 million on average. 


Finally, it is worth mentioning that the initial setup cost of the Cash Receipt System including equipment purchase and computer program development amounted to approximately USD 25 million.