Seo Kyung Ho
The author is an editorial writer for JoongAng Ilbo.
Many people are dissatisfied with the legislative branch these days. Corporate tax is the biggest issue between rival parties. The government and the People’s Power Party (PPP) are proposing to cut the top corporate tax rate from the current 25% to 22%. But the Democratic Party (DP), which holds the majority, opposes the move, arguing it favors rich companies. Proponents say that South Korea’s corporate tax rate is above the average of OECD member countries, so South Korea’s highest corporate tax rate is expected to stimulate investment, save costs, make companies more competitive, and attract more foreign investment. He argues that the corporate tax rate needs to be lowered. Critics question the effectiveness of the tax cuts. Until now, most of the benefits of tax cuts have gone to large corporations.
Academics are similarly mixed. A 1% reduction in the corporate tax rate would increase investment by 0.46%, employment by 0.13% and real GDP by 0.21%, according to a report by the Korea Development Institute (KDI). But opponents say data show companies did not increase hiring, investment, wages or dividends when corporate taxes were cut under President Lee Myung-bak. The conservative government under Park Geun-hye imposed a tax to collect excess corporate profits in 2014.
In principle, I support corporate tax cuts. Corporate tax has a direct impact on competitiveness. Tax cuts help businesses and benefit the economy in the medium to long term. That is the basis of economics. However, whether the cut should be made now is debatable. The tax cut is a fiscal stimulus and runs counter to the Bank of Korea’s monetary tightening to curb inflation. An economy facing multiple challenges requires team play. Decoupling fiscal and monetary policy does not bode well for the economy. The government estimates his 13.1 trillion won ($10 billion) loss in revenue, including her 6.8 trillion won from businesses, due to revised tax laws.
National Assembly Speaker Kim Jin-pyo has put together a compromise plan in which the Democratic Party accepts corporate tax cuts and implements the tax cuts in two years. Another brief suggested fewer cuts and a longer grace period.
Two years of National Assembly Speaker Kim Jin-pyo hitting the gavel at the National Assembly on December 11th. [YONHAP]
PPP is open to compromises. But DP remains immobile. The Liberal Party needs to listen to tax expert Chairman Kim’s compromise. Under President Kim Dae-Jung, he served as director of the tax policy division of the Ministry of Finance and Economy, and under President Roh Moo-Hyun, he served as Minister of Finance.
Kim’s proposal has several advantages. First, it avoids the mismatch between monetary tightening and spending increases. The International Monetary Fund (IMF) has judged South Korea’s fiscal policy to be expansionary this year. Since prices are expected to continue to rise for some time after next year, corporate tax cuts should be avoided amid high price pressure. Timing is critical in corporate tax.
Second, much of the uncertainty about contested cuts can be removed. Once the government’s corporate tax reduction plan is finalized, businesses will be able to better design their investment plans accordingly. It can also send the message that governments are shifting to more business-friendly policies.
No political framework needed. When the Roh administration introduced a comprehensive property ownership tax in his 2005, the country was divided between wealthy taxpayers and ordinary citizens. Such a fragmented framework should be avoided. The Democratic Party should accept the House Speaker’s compromise and condition the debate on long-term tax increases. Governments and PPPs, who are reluctant to raise taxes after tax cuts for fear of losing votes, may also agree. Such acts are also appropriate for DPs who have future chances to redeem governing experience and governing power.
Alongside tax cuts, the government and Congress must work to create a better environment for doing business. Multinationals consider tax benefits as well as the regulatory, workforce and business environment when making investment decisions. The ability to resolve social conflicts politically is also important. Unfortunately, the current Diet and government do not have such an ability.
