Welfare vs. Taxes in Korea: Nobody wants to Pay the Piper

It might appear that Korean politicians are not complete fools after all.

When President Park Geun-hye was campaigning to become president, she promised that she would deliver a lot of goodies, and much more, without ever raising taxes.

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A few days ago, however, Representative Kim Moo-sung, the chairman of her own party, said, “It is impossible to finance welfare without tax hikes, and it is inappropriate for politicians to deceive the people.”

Representative Kim was not alone in voicing this sentiment.

So do Koreans want a greater welfare state? The answer seems to be “yes and no.”

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As Steven Denney said in his recent article in the Diplomat, in a poll that was commissioned by JTBC, 46.8 percent of the public favor welfare cuts over a tax increase. 34.5 percent of the public think that a tax increase is needed to pay for welfare; and 18.7 percent didn’t know what to think.

So it might seem that many people do not support expanding the welfare state. However, one always has to remember the old adage about lies and statistics. That is because 52.8 percent of the respondents, a clear majority, supported increasing the corporate tax rate.

What Mr. Denney got absolutely right was when he said “The simple fact of the matter is that South Koreans might not support more welfare, if it means that they have to pay for it.”

(What Mr. Denney got absolutely wrong was that he thinks Korea needs a welfare state.)

Isn't that typical? Everybody wants to go to the party, but nobody wants to pay the piper. Case in point, when salaried workers angrily protested that many of them were likely to pay additional taxes this year instead of receiving a tax rebate, a move that was made by the government in order to help pay for its welfare programs, Finance Minister Choi Kyung-hwan said the government would consider revising tax return regulations.

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It yet again goes to prove that Frédéric Bastiat was absolutely right when he said, “Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”

So who will be made to pay more taxes? The easy answer seems to be to raise the corporate tax.

After all, Finance Minister Choi said that the government may consider raising corporate taxes and that “the government does not regard corporate tax as too sacred of a realm to enter.”

But will raising corporate taxes come at no cost? I will let the maestro speak for himself.

However, as succinct as Milton Friedman was, this video did not even cover other questions. Could it cause domestic corporations to invest less in order to pay less corporate taxes? Or might it cause them to invest elsewhere? Could it lead to more corporations hiding their money in overseas bank accounts? How much more will it cost taxpayers for the government to investigate and try business owners for tax evasion? Could it dampen foreign investments? If so, by how much?

Assuming that we can even find answers and practical solutions to those questions, then we have to ask the second batch of questions. Will welfare benefits remain constant? Will increasing welfare benefits help to lift the poorest Koreans out of poverty so that they will no longer need to rely on welfare? How will aging and low birth rates affect welfare programs, future taxation, and the national debt?

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In regards to the Saenuri Party's leadership's dithering about welfare benefits and taxes, Mr. Denney rhetorically asks “Is this strategic dissonance, or does Saneuri simply not know what it wants?”

It is certainly not the latter. All political parties in the world want the same thing. They either want to attain or retain political power. Ipso facto, the correct answer is the former.

However, this dissonance is not limited to the Saenuri Party. It is an ailment that the entire country is suffering from. To use an analogy, all democratic republics in the world act like a mirror; and are, therefore, a reflection of the body politic. And as I said earlier, everybody wants to go to the party, but nobody wants to pay the piper.

Mr. Denney, (and other like-minded people) was wrong then, and assuming that his position has not changed, he is wrong now. Korea does not need a welfare state. If anything, it is the very last thing it needs.

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The Korean Wave and the Broken Window Fallacy

They are beautiful and relatively clean looking. Though they often push the envelope in regards to what might be considered too risque to be shown on television (as has been written about expertly in this article in The Grand Narrative), for the most part, they appear non-threatening and they try their hardest to be as inoffensive as humanly possible. And occasionally, some of them will actually be talented.

That is K-Pop and K-Drama in a nutshell. In all fairness, this description probably fits almost every mainstream entertainer from all around the world.

With the occasional oddity that slips through the cracks once in a while (read, Psy), these are the criteria that wannabe superstars have to meet in order to be part of the Korean Wave. When I say “Korean Wave,” however, I am referring to it as the marketing tool that the government uses in order to sell a sugarcoated image of Korea to the rest of the world to either attract tourists or other kind of Foreign Direct Investments (FDIs).

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However, it is important to clarify that I do not mean to say that those entertainers would not be successful at all without government support. It should be noted that companies like YG, JYP, and SM Entertainment are for-profit private entities, albeit in bed with the government. With or without government assitance, however, they will continue to produce what sells. And if there were no demand for K-Pop or K-Dramas in their current form, you can bet your mother’s pension that they would stop producing it.

The Korean government’s financial aiding of the K-Entertainment industry, however, is not for domestic consumption. It is without question that government regulation of the industry in the past was for the specific purpose of weeding out “subversive” elements, aka censorship. Although vestiges of that era still remains to this day, government meddling in the entertainment industry today is mostly geared towards the goal of exporting it.

And, according to this article in Soompi, business is booming!

PARTY TIME!!!
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So has the government’s involvement in the industry paid off? It would be difficult to disagree. After all, US$106 million in the first three months of the fiscal year is no small change. Those earnings are very real. On top of that, considering the fact that the financial successes of the entertainment industry also means that it was (partially) successful at selling its goods overseas, that means that the number of tourists visiting Korea will likely increase as well. And there will certainly be shop owners, big and small, who will never complain about that. If nothing else, it has at the very least succeeded in increasing people’s awareness of Korea. There isn’t even a shadow of a doubt that all of this was the government’s end goal all along.

More business, more tourists, and more profits! How could anyone complain about that? It appears that I may have to swallow my pride and accept that government interference in the private sector has produced marvelous results.

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But has it really?

In 1850, a French economist named Frédéric Bastiat (pronounced Bas-tee-aa) wrote an essay titled “That Which Is Seen, and That Which Is Not Seen.” In this essay, Bastiat wrote what he was going to be best known for – The Parable of the Broken Window, which later began to be referred to as the Broken Window Fallacy.

Basically, this is how the parable goes:

A young boy in a village breaks a window pane in his father’s shop. A crowd gathers around and they try to look at the bright side of things. They say that now that the window has been broken, the shopkeeper will have to spend money to pay a glazier to replace the broken window. That glazier will then be able to use that money to buy himself a loaf of bread from the baker. The baker then can use that money to buy a pair of shoes from the shoemaker. And it goes on and on.

So the crowd takes pleasure at the thought of this. As far as they are concerned, this young boy who broke his father’s window has helped to stimulate business in the village.

But the shopkeeper who had his window broken is not happy. He chastises them and says that they are all being silly. If his window had not been broken, he would have been able to use his money to buy a new suit from the tailor. The tailor would have then used that money to buy meat from the butcher. And it would have gone on and on.

In other words, had the window not been broken, the local economy would have gained a new suit. But now that the window has been broken, the local economy has gained nothing. It has merely had a window replaced.

The problem was that the crowd was only able to see what was visible – actual costs and benefits. They could not see the unseen, the what-might-have-been, aka opportunity costs.

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So what does this 164-year-old essay have to do with the Korean government’s financing of the entertainment industry? Everything!

Firstly, the only money that a government has is the money that it collects from the people via taxes. Therefore, when the goverment collates all that tax monies that it has scraped from the people, all the way from Seoul to Jejudo, it should not surprise anyone that there is a significant amount of money. And when a chunk of that significant amount of money is given to one particular person or group, such as the entertainment industry, it should also come as no surpise if the recipients of that money become quite rich all of a sudden.

But what are the hidden costs? The what-might-have-been? Do those benefits cost nothing? It has to be remembered that the taxpayers, from whom that money came from in the first place, are now poorer by exactly that much money. Can you picture the billions or even trillions of interconnected economic activity that would have occurred had millions of taxpayers not been deprived of their money to fund this special interest group the entertainment industry?

To get a small glimpse of what billions of economic interconnections look like, watch this video.

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If you actually can picture it, you’re on drugs. Unless we develop a way to look into parallel universes, there is no real way to calculate the economic costs and benefits of things that never occurred.

Yes, YG, JYP, and SM Entertainment have certainly benefited. The singers and performers have gained fame, notoriety, and riches. The executives have gained massive wealth. Yes, some shopkeepers have certainly benefited from the arrival of tourists. But at what cost?

Does it make sense to deprive so many people of their money in order to finance an already highly profitable industry? Is it just?

I know what I think. What about you?

That Which Is Seen, and That Which Is Not Seen
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