Indefinite extension of fuel tax cut raises concerns
The possibility of extending a years-long fuel tax cut is raising questions about its effectiveness in easing the economic burden on households, as the government intended.
Concerns are also being voiced regarding whether extending the tax cut indefinitely will indeed achieve the desired outcome.
Some experts maintain a pessimistic outlook regarding the prolonged fuel tax cut.
They said it mainly benefits upper-income households, who tend to use more energy by driving bigger cars and living in larger homes than those in lower income brackets.
“It is the poorer households that are bearing the brunt of inflation and other economic challenges, but I don’t think the fuel tax cut does much to help them save money,” Citizens’ Coalition for Economic Justice coordinator Lee Jong-yun said Wednesday.
“In that regard, I am against the fuel tax cut being extended over and over, and even lasting permanently,” he added.
Speaking on condition of anonymity, a Korea Institute of Local Finance researcher cited a study by the think tank that showed people in the bottom of the five-tier income bracket saved 880 won per month on average from the fuel tax cut.
The savings varied across income tiers, with individuals in the fourth tier saving less than 2,042 won, those in the third tier saving 3,050 won, those in the second tier saving 3,600 won, and individuals in the top tier saving 5,578 won ($4.30).
The finding coincided with Deputy Prime Minister and Minister of Economy and Finance Choi Sangmok’s statement on Monday, suggesting that the government might contemplate extending the fuel tax cut further when it expires next month.
The maximum legal cap for the cut on gasoline taxes is 25 percent, while the tax cut on diesel is 37 percent, after the government implemented the scheme in 2021 seeking to revitalize the pandemic-hit economy.
Originally intended to last only several months, the scheme persists to date, having been extended eight times. These extensions were justified under the pretext of countering volatile global oil prices and persistently high inflation in Korea, among other factors.
Choi hinted at the possibility of a ninth extension after global oil prices shot up to a four-month high last week as the war in Ukraine and armed conflict between Israel and Hamas intensified.
“The government can come up with a string of reasons to extend the fuel tax cut, but it is not simply right because risks concerning energy will not go away, and the fuel tax cut will go on forever,” Lee said.
The experts also assessed the extended fuel tax cut is not helpful for the government as it struggles with a record shortfall in tax revenue.
The revenue fell by 51.9 trillion won in 2023 from a year earlier, with the fuel tax cut accounting for around 5 percent of the shortage, although it was mainly due to weak corporate activities and a property market slump.
It is not simply right because risks concerning energy will not go away.