the economy. TIETP could spur consumption with the expectation of tax cuts (seemingly, very marginal but a clear reduction in the cost of the expenditure) and even more with the credit provided by credit cards. According to the survey conducted by the Korea Institute of Public Finance (2016, 209), 31.3 percent of respondents selected payment possibility without cash at hand as the first reason to use credit cards; 16.6 percent selected the convenience of payment without changes; 13.2 percent cited various rewards provided by credit card companies; 12.4 percent noted the tax deduction; 10.7 percent appreciated the possibility of installment payments; 10.1 percent opted for credit cards because of payment possibilities without a balance in the account. In this sense, tax incentives for debit cards or electronically traceable cash receipts may have fewer distortive effects on consumption and saving choices but relatively bigger substitution effects between nontraceable and traceable payments. Korea experienced the negative effect of overconsumption in the early stages of TIETP. Credit card transactions in Korea skyrocketed between 1999 and 2002 after the introduction of TIETP, as shown in Figure 3. While such a drastic increase in credit card transactions contributed to broadening the tax base to a great extent, overconsumption based on credit facilitated by credit cards put the Korean economy under tremendous stress. It was believed that TIETP coupled with deregulation of the credit card business, credit companies’ reckless issuance of credit cards, and lax credit controls caused widespread credit‐card‐debt defaults and led to the collapse of at least one credit card company during 2002–2003. In response to this negative effect of TIETP, the Korean government in 2003 increased the deduction rate of TIETP for debit card transactions from 20 percent to 30 percent to favor debit card usage, while maintaining the deduction rate for credit card transactions. In addition, ETCR was introduced in 2005. These measures shifted a substantial portion of credit card transactions to debit cards or ETCR transactions.

Seventh, given that tax deduction unevenly benefits higher income deciles over others, under the progressive PIT structure, tax credits as a format of TIETP are worth reviewing as a policy alternative. As mentioned in the previous chapter, although Korea’s TIETP has net positive effects on the GINI coefficient due to the tax‐broadening effect, regressive effects of tax deductions were also seen.

Lastly, it should be admitted that TIETP broadens the tax base by taking advantage of tax incentives. TIETP provides a tax relief, which has a lock‐in effect as do other tax incentives. Many discussions conclude that TIETP should be repealed because it has broadened the business income tax base sufficiently; nonetheless, TIETP remains in place in Korea because it has created vested interests among wage and salary earners. Furthermore, it is not clear if business income would continue to be reported honestly if TIETP were withdrawn. Given these questions, further research may be needed to support a definitive conclusion that TIETP has actually enhanced voluntary compliance and changed taxpayers’ behavior for good.

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