Strategy for Establishing a Link Between the Earned Income Tax Credit and Social Insurance Subsidy Program

Abstract

In this study, we examine policy recommendation for linking the EITC(Earned Income Tax Credit) and the &ldquo;Durunuri Social Insurance Subsidy Program.&quot; The former was first implemented in 2008 to support the workingpoor who are excluded from the social safety net, and the latter program was first introduced in July, 2012 to expand social insurance coverage to low-paid workers who are currently uncovered. The main purpose of linking these two programs is not only to relieve the financial burden of the government, but also to enhance the efficiency of both programs. In many developed countries, subsidizing social insurance contributions of low-skilled workers and the long-term unemployed is a popular policy option to increase financial incentives to work, although the effectiveness of the program differs by target, aim and coverage of the program. In general, studies find that subsidizing social insurance contribution of employers increases demand for low-skilled labor while generating substantial costs, such as deadweight loss, substitution cost and displacement effect. <br><br><br><br>In Korea, two programs with a similar purpose were implemented shortly one after the other, putting unnecessary burden on government budget. Moreover, a lack of connection between the two governing agencies-National Tax Service for the EITC and the National Health/Employment Insurance Corporation for the Durunuri Social Insurance Subsidy Program - as well as a shortage of data on benefit recipients reduces the program effectiveness, since prior social insurance coverage of the EITC recipients are unknown. As a result, a pilot project of the Durunuri program ended up subsidizing mainly workers who are already covered by social insurance. Only 17% of the program budget were spent to expand socal insurance coverage for those who are previously uncovered. <br><br><br><br>Based on our study, we expect that our policy recommendation for linking the EITC and the Durunuri Social Insurance Subsidy Program will substantially enhance program efficiency as well as economic efficiency, since there will be substantial cost savings from cutting down financial resources that are currently wasted on overlapping programs. In addition, data sharing between the National Tax Service and the National Health/Employment Insurance Corporation will considerably improve the targeting of the social insurance subsidy program to effectively achieve its original aim of expanding social insurance coverage to previously uncovered workers and strengthen social safety net protection for EITC recipients. Our policy recommendation coincides with the principle of government paternalism which posits that the government is responsible for providing social insurance for the best interest of its people. Above all, we expect that our policy recommendation would guarantee a stable life for the workingpoor by providing a firm safety net that would protect them from various social risks they could encounter in their future lives.

In this study, we examine policy recommendation for linking the EITC(Earned Income Tax Credit) and the &ldquo;Durunuri Social Insurance Subsidy Program.&quot; The former was first implemented in 2008 to support the workingpoor who are excluded from the social safety net, and the latter program was first introduced in July, 2012 to expand social insurance coverage to low-paid workers who are currently uncovered. The main purpose of linking these two programs is not only to relieve the financial burden of the government, but also to enhance the efficiency of both programs. In many developed countries, subsidizing social insurance contributions of low-skilled workers and the long-term unemployed is a popular policy option to increase financial incentives to work, although the effectiveness of the program differs by target, aim and coverage of the program. In general, studies find that subsidizing social insurance contribution of employers increases demand for low-skilled labor while generating substantial costs, such as deadweight loss, substitution cost and displacement effect. <br><br><br><br>In Korea, two programs with a similar purpose were implemented shortly one after the other, putting unnecessary burden on government budget. Moreover, a lack of connection between the two governing agencies-National Tax Service for the EITC and the National Health/Employment Insurance Corporation for the Durunuri Social Insurance Subsidy Program - as well as a shortage of data on benefit recipients reduces the program effectiveness, since prior social insurance coverage of the EITC recipients are unknown. As a result, a pilot project of the Durunuri program ended up subsidizing mainly workers who are already covered by social insurance. Only 17% of the program budget were spent to expand socal insurance coverage for those who are previously uncovered. <br><br><br><br>Based on our study, we expect that our policy recommendation for linking the EITC and the Durunuri Social Insurance Subsidy Program will substantially enhance program efficiency as well as economic efficiency, since there will be substantial cost savings from cutting down financial resources that are currently wasted on overlapping programs. In addition, data sharing between the National Tax Service and the National Health/Employment Insurance Corporation will considerably improve the targeting of the social insurance subsidy program to effectively achieve its original aim of expanding social insurance coverage to previously uncovered workers and strengthen social safety net protection for EITC recipients. Our policy recommendation coincides with the principle of government paternalism which posits that the government is responsible for providing social insurance for the best interest of its people. Above all, we expect that our policy recommendation would guarantee a stable life for the workingpoor by providing a firm safety net that would protect them from various social risks they could encounter in their future lives.