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Full Version JKWS, Vol.2, No.2.Pdf Vol. 2, No. 2, December 2018 ISSN: 2586-0682 i JKWS Editorial Committee Editor Jae-jin Yang Yonsei University Managing editor Ijin Hong Yonsei University Editorial board Young Jun Choi members Yonsei University Heejung Chung University of Kent Margarita Estevez-Abe Syracuse University Timo Fleckenstein London School of Economics Dokyun Kim Gyeonggi Research Institute Sung-Won Kim Tokyo University Taeil Kim Korea University Yeong-Soon Kim Seoul National University of Science and Technology Thomas Klassen York University Cheol-Sung Lee Sogang University Jooha Lee Dongguk University Kinglun Ngok Sun Yat-Sen University Shih-Jiunn Shi National Taiwan University Ilcheong Yi United Nations Research Institute for Social Development Jong-sung You Gachon University Editorial staff Seola Han, Jungju Lee JKWS ii Volume 2, Number 2, December 2018 Contents 01 Tax perception matters. Preferences for welfare expansion with a tax p. 1 increase Jong Ye Kum, Hyunsub Kum 02 Who are Outsiders in the Dualized Labor Market in South p. 31 Korea? A Fuzzy-set Analysis Ho-yeon Lee, Jae-jin Yang 03 Population Aging and International Migration Policy in South p. 73 Korea Dong-Hoon Seol Vol.2, No.2, December 2018, 1-30 Tax perception matters Preferences for welfare expansion with a tax increase Jong Ye Kum Ph.D. candidate, Graduate School of Public Administration, Seoul National University. [email protected] Hyunsub Kum (Corresponding author) Professor, Graduate School of Public Administration, Seoul National University. [email protected] Abstract This study empirically analyzes the effect of tax perceptions on preferences for welfare expansion that entails a tax increase. Since explicitly mentioning a potential tax increase triggers considerations about the costs, as well as the benefits, of welfare expansion, it is assumed that tax perceptions have an effect on welfare preferences. Based on the traditional perspectives on welfare preferences, two variables of tax perceptions were set. The first is the perception of one's own tax burden, which reflects the aspect of self-interest. The second is the progressive taxation preference, which represents the aspect of value and is constructed by combining the tax perceptions of the poor and the rich. The results show that the perception of one’s own tax burden has a negative impact on welfare preferences only when a tax increase for welfare expansion is stipulated. This implies not only that people regard welfare expansion itself separately from welfare expansion with a tax increase, but also that the self- interest orientation is revealed as “perceived self-interest” rather than actual self- interest when cost is taken into consideration. In contrast, progressive taxation preference has a positive effect on welfare preferences regardless of whether a tax increase is mentioned. Furthermore, for people who perceive their tax burden as high, their welfare preference is more likely to turn negative when they are facing a tax increase, whereas the progressive taxation preference does not induce changes in welfare preference. The results also show that the perception of one’s own tax burden has a clearer effect in the low- and middle-income bracket, while progressive taxation preference has a clearer effect in the high-income bracket. Keywords Welfare preferences, tax increase, tax perceptions * This article is an updated English version of the original work in Korean: Kum, Jong Ye; and Kum, Hyunsub (2015). “Jeungsewa bokjihwakdaee daehan taedo: segeumbudam insikeul jungsimeuro”. Hanguk haengjeong hakbo. 51(1): 1-29. Journal of the Korean Welfare State and Social Policy 2 Introduction Welfare expansion can be regarded as one of the South Korean government’s predominant policy initiatives in recent times. Over the past few years, free school lunches, basic pension, and childcare subsidies have been adopted by both the central government and local government bodies, and even now, debate continues over proposals for youth allowance and basic income. In 2007, nearly KRW 130 trillion of the Korean government’s total budget of KRW 400.5 trillion was allocated to public health, welfare and employment, and new policies continue to be adopted aimed at addressing the low birthrate and the aging society. Though there is disagreement about some of these policies, what is clear is that the Korean government will be providing a greater variety of services to a larger number of people in a more organized fashion. Considering that Korea has been categorized as having both lower taxes and less welfare spending than Western countries, this recent tendency represents a substantial change, and there has naturally been growing interest about how to secure the requisite funds. Presuming a limited budget, increasing welfare spending ultimately puts pressure on the funding of other areas, including economic and industrial development and social overhead capital. This makes it necessary to find an additional source of funding to meet the growing demand for welfare. While every Korean administration has expressed definite support for welfare expansion since the basic livelihood security system was established in 2000, they have generally adopted a more ambiguous position on how to fund that expansion. These administrations have made at least one thing fairly clear, however: they will not raise taxes. This shows that Korean society’s demand for welfare expansion is equaled by its discomfort with tax increases. To be sure, there are some figures, mostly academics, who emphasize that raising taxes is necessary to expand welfare, but the views that welfare expansion can be achieved through restructuring without tax increases and that welfare should be expanded within the bounds of fiscal stability can be described as constituting a relative majority. It is also true that some of those who recognize the need for increasing taxes are skeptical about whether this is feasible. The fact is that policy makers both in the government and politics feel rather uncomfortable with the idea of raising taxes, and that is the case even when a tax increase is presented as a way of financing the welfare expansion that the majority of the populace want. That raises the questions of how ordinary Koreans think about tax increases aimed at expanding welfare, how much they are actually willing to pay for the benefits that welfare brings them, and how much they are willing to pay for the benefits that welfare brings to Korean society as a whole. In theory, securing public support is a key aspect of implementing government policy. Public support is even more essential in the case of welfare policy and tax increases, since these represent the redistribution of costs and benefits to the public. In such cases, individuals are generally thought to support a given policy when they stand to gain a net benefit from it or when it is consistent with their internal belief system. That is to say, individuals support policies that are beneficial to them (oriented on self-interest) or that they regard as being beneficial for the development of society (oriented on values). However, the reality seems to be a little more Jong Ye Kum & Hyunsub Kum 3 complicated. For example, in the United States and a number of other countries there is a paradoxical tendency for the low-income bracket to support policies that are beneficial for the high-income bracket, such as cutting taxes on the wealthy and abolishing the inheritance tax (Roemer, 1998; Bartels, 2005; De La O & Rodden, 2008). Related research has concluded that one of the reasons for this is that the members of the low-income and middle-income brackets, who are likely to benefit from welfare policy, in fact have a subjective perception of taxation that distorts their understanding of their self-interest. That is, subjective bias can interfere with the calculation of objective interests and create distortions, and such bias can be especially conspicuous in the case of taxes, which imply an immediate loss. When it comes to taxation, in fact, the distribution of costs and benefits resulting from a tax increase is easier to differentiate by income bracket since the majority of countries have a progressive system of taxation. Nonetheless, the aforementioned paradoxical tendency occurs, caused not only by the amount of taxes actually being paid but also by a subjective perception of the tax burden, which appears to play an important role here. The numerous surveys carried out thus far in Korea generally show a rapid increase in welfare demand among Korean citizens and corresponding support for government expansion of welfare. Nevertheless, as we have already mentioned, not much is known about welfare expansion preferences when explicit mention is made of the financial cost and, more specifically, the possibility of higher taxes. In that sense, this paper examines what differences are found in welfare expansion preferences when the issue of cost (that is, tax increases) is explicitly considered and when it is not. The objective here is to gauge welfare expansion preferences that are less simplistic and more substantive. If welfare preferences are found to vary when welfare expansion is accompanied by a tax increase, the causes of that variation merit research. This paper seeks to examine subjective tax perceptions by drawing attention to the influence of subjective bias, as proposed in behavioral economics. In general, subjective perceptions of tax can be understood in two ways. First, since a tax increase represents an addition to the original tax burden, individuals’ perception of their original tax burden is likely to play an important role in interpreting the significance of that tax increase. The more burdensome an individual considers their perceived tax burden to be, in other words, the more negative their perception about a tax increase will be. Even if the tax increase in question is supposed to fund welfare expansion, the individual will be comparing the benefits resulting from that welfare expansion not with the new tax increase per se but with the sum of that tax increase and their original tax burden.
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