콘텐츠 바로가기
로그인
컨텐츠
  • HOME
  • SEARCH
PLUS Text Size MINUS RESET
FACEBOOK TWITTER Linked In

Category Open

Resources

tutorial

Collection of research papers and materials on development issues

home

Resources
Economy Economic Administration

Print

Lessons

Related Document
Frame of Image

Lessons06



Full Text
Title Lessons
Similar Titles
Material Type Reports
Date 2015
Language Korean
File Type Theme
Subject Economy < Economic Administration
License

Abstract

Sub-Theme 4 | Lessons





This article has illustrated how effectively the Credit Card Income Deduction Program and the Cash Receipt System have disclosed the cash economy in Korea. These two programs are unique in the world. Korea provides an excellent example of systems that countries concerned about uncovering their shadow economies could implement without much difficulty. However, Korea’s experiences also provide some lessons that policy makers should consider before adopting these programs.





Increase of the Credit Delinquents



When the Credit Card Income Deduction Program was introduced, the Korea government encouraged credit card companies to issue credit cards to as many people as possible in order to boost credit card transactions. Therefore, the number of credit cards issued in Korea more than doubled just in two years. Table 5 shows that the number in 1998 was 42 million, but soared to 104 million in 2000.


[Table 5. Number of Credit Cards Issued in Korea]


(Unit: Thousands)































Year 1996 1998 2000 2002 2004 2006 2008 2010 2012

Number

41,113 42,017 57,881 104,807 83,456 91,149 96,248 116,589 116,374

Source: Credit Finance Association of Korea.



This resulted in a huge increase in credit card spending as illustrated in Table 5. However, this short-time rapid expansion of credit card issuance led to widespread credit delinquency a few years later mainly because many of the new credit cards were issued to unqualified individuals without a stable income source. 

 
[Table 6. Number of Credit Delinquent Borrowers in Korea]


(Unit: Million)

































Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

People

1.93 1.97 2.08 2.48 2.64 3.72 3.62 2.98 2.80 2.58

Sources: National Assembly Research Service (2009), Financial Services Commission (2016).

 
[Figure 4. Number of Credit Delinquent Borrowers in Korea]


(Unit: Million)




Sources: National Assembly Research Service (2009), Financial Services Commission (2016).



Needless to say, the increase in the credit card default rate had a highly negative effect on the national economy. So it is important to note that credit card-related government policies should be designed in consideration of credit risk.





Regressive Income Redistribution Effect



Both the Credit Card Income Deduction Program and the Cash Receipt System are designed as taxable income deduction programs. ##MORE_LAYER_BOX##This means that a portion of the credit card usage amount and the cash receipt amount are deducted from the income tax base where a marginal tax rate is applied.##MORE_LAYER_BOX_END## The amount saved is calculated by multiplying the taxable income deduction amount by one’s marginal tax rate.



Under the progressive income tax scheme, high income taxpayers receive more tax benefits from the taxable income deduction system because their marginal tax rate is higher than low income taxpayers’ marginal tax rate. ##MORE_LAYER_BOX##For example, suppose two persons, A and B, have the same credit card income deduction amount of USD 1,000. If the marginal tax rate of A and B is determined from their level of income as 10% and 30% respectively, then A can save his/her tax by USD 100 and B can save by USD 300.##MORE_LAYER_BOX_END## Hence, the Credit Card Income Deduction Program and the Cash Receipt System are more favorable for high income people.



The basic function of the progressive income tax scheme is to achieve income redistribution among taxpayers by levying much higher tax to high income people and much lower tax to low income people. ##MORE_LAYER_BOX##However, these programs are regressively working because high income people are likely to have more tax benefits.##MORE_LAYER_BOX_END## In this sense, it could be better to operate the Credit Card Income Deduction Program and the Cash Receipt System as a ##3D_LAYER##tax credit program##3D_TEXT:A tax credit is an amount of money a taxpayer is able to subtract from taxes owed to the government. The tax credit is applied to the tax calculated which is determined by the income tax base.##3D_LAYER_END##,  which does not depend on tax base and marginal tax rate. 





Abolishing the Credit Card Income Deduction Program: Difficulties



Table 7 and Figure 5 show that the increase in credit card usage has gradually alleviated since 2010. ##MORE_LAYER_BOX##According to the Credit Finance Association, the amount of usage, which was USD 192 billion in 2004, increased to USD 369 billion in 2011, but increased further by USD 49 billion over the next three years.##MORE_LAYER_BOX_END## This suggests that the growth rate of credit card usage has reached a somewhat stable trend. 


[Table 7. Credit Card Spending Amount and Percentage of Credit Card Usage out of


Total Domestic Private Consumption Expenditure Since 2010]


(Unit: billion USD)































Year 2010 2011 2012 2013 2014

Credit card usage

344 369 399 408 418

Percentage

64.78 65.17 67.56 67.26 66.99

Sources: Credit Finance Association, Bank of Korea.

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




[Figure 5. Credit Card Spending Amount and Percentage of Credit Card Usage out of


Total Domestic Private Consumption Expenditure Since 2010]




Sources: Credit Finance Association, Bank of Korea.

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

Notes: 1. percentage (%).

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



The purpose of the Credit Card Income Deduction Program was to encourage consumers to use their credit cards. Eighteen years later it is now common to use a credit card for even small purchases like buying a cup of coffee. ##MORE_LAYER_BOX##From this perspective, we might conclude that the effect of the Credit Card Income Deduction Program is already maximized and it is time to abolish this policy.##MORE_LAYER_BOX_END## However, because this program has now become a representative tax relief for labor workers, its abolition could be perceived negatively by those workers, as an increase in their tax burden, thus inducing their strong tax resistance. After 2010, whenever the sunset of this program was approaching, there were fervent debates over whether or not to maintain the program. Eventually, the program was extended. Korea’s experience in this sense shows how hard it is to abolish this kind of program once it is introduced.