Defining a proper role of government within a society has been a subject of heated debates for many years. Recently it has become a key feature in policy debates between the conservatives and the liberals. The conservatives, being disciples of liberalism and natural rights, emphasize the harm of government failures and argue for smaller government and lower taxes. on the other hand, the liberals stress imperfections inherent in the market economy and contend that big government and tax raises are necessary to fix market failures. 

That small government-big market is superior to big government-small market can be easily induced from historical experiences. Throughout the history of mankind, we rarely observe a case where big government-small market enriched the lives of the populace. History of industrialized countries of today shows us that they became fast-growing affluent societies before they became big government-welfare states with various welfare and redistributive policies. Not a single incidence can we observe where a country gained affluence by making redistributive welfare policies a priority before its economy reached a developed stage. 

Nowadays the assertion that not only should we try to emulate the economic success stories of the advanced countries but we should also adapt their welfare systems and large-scale fiscal spending is gaining some popularity. The idea is, undoubtedly, politically very attractive and, hence, popular among the general public. However, it fails to consider the potentially enormous side effects of the waste and inefficiencies big governments are known to create. Especially in the information age when globalization is modus operandi, it is evident that a small government approach is the only viable option. 

This report was written with conviction that Korea's economic prosperity can be achieved only by adapting the small government-big market philosophy. Instead of covering all things fiscal, the report provides in-depth analyses by consistently applying the principles of market economy to a few select topics.  

This report consists of three parts. In part 1, the functions of government and the economic problems currently facing Korea are reviewed. Specifically, it starts out with a canonical analysis of the meaning and the functions of government followed by rigorous examination of cases where government intervention is arguably justified. It then provides a basis for why such government interventions are bound to fail by demonstrating the dominance of market forces over bureaucratic intervention efforts. It is argued that this is the root cause of those problems economic and fiscal policy makers are now facing. Lastly, it is argued that the focus of current debates on the fiscal deficits and the growing size of the national debt is misplaced. It would be more beneficial if the debates on fiscal policies focused rather on evaluating productivity and efficiency of the current fiscal spending.  

The theme of the report's second part is a critical review of the concept of national budget. First, it examines the structural flaws and operational shortcomings of the recently implemented “National Finance Act”, designed to serve as the foundation for national fiscal management. Then, it proceeds to consider ways to deal with growing sizes of fiscal deficits and national debt, and argues for a shift of paradigm from 'what should the government do?' to 'what should the government not do?'. The report uses simple examples to illustrate the ineffectiveness of early execution of budget which traditionally has been a favorite tool of the government to boost the economy. The report also touches on the issue of social bipolarization, which is increasingly gaining importance in the eyes of policy makers. The contribution of this report here is that by specifying the exact economic definition of bipolarization, it eliminates pervasive, yet misleading, confusion that is caused by loose use of the term. Based on the precise definition of bipolarization, the report surveys and critically evaluates the government's proposed solutions to narrow the gap between the haves and have-nots. Part 2 of the report ends with two additional controversial issues; local finance and public health service. It gives diagnosis of the current fiscal structures of local governments and suggests ways to reform the problematic current system to promote soundness. Regarding the public heath service, the report reevaluates its basic concept and looks into ways to improve equality and efficiency in providing health care. 

Part 3 deals with tax-related issues. Debates on the need for fundamental overhaul of tax regimes are raging in the academic arena as well as among advanced countries. The topics include; replacing income tax with consumption tax, abolition of a corporate income tax, substituting progressive income tax rates with a single proportional rate. Historical evidence suggests that a new regulatory real-estate policy came out once in a year on average. Interestingly, a counteractive appeasement policy came out with some regularity as well, once in every two years on average. This report considers the effects that this kind of policy mix has on the real-estate market and assesses the overall effectiveness of such policies. In addition, the report proposes, based on concrete economic reasoning, reintroduction of abolishment of a corporate income tax, initially proposed by the author in 1985 and later revived by a group of leading experts causing a controversy in 2002. The fallacy of “tax reduction policies that aim to enhance economic well-being of middle and low income classes” is also presented in this part. Further, the report points out structural shortcomings in local tax system, and calls for a unified system that would be responsible for both local and national tax administration as well as collection of four major insurance premiums to ensure an optimal alignment of tax and welfare policies. 

The contribution of this report is twofold. First, it provides a fresh and fundamental insight with which to view economic and fiscal policies. Second, instead of focusing on specific time period with limited data, the report examines the fundamental aspects of major fiscal issues Korea now faces from the historical perspective imbued with small government-big market philosophy. As such, this report will be a valuable reference to those in political, academic, and business arenas interested in fiscal policy issues.