[보도] Is Korean Corporate Tax System Acceptable?

A self-described “libertarian Republican,” former Federal Reserve Chairman Allen Greenspan strongly criticized President George W. Bush’s economic policy in his memoir, “The Age of Turbulence: Adventures in a New World.”

He bashed Bush for yielding to the political interest and forsaking the fiscal disciplines of small government. The political interest here means the Iraq war. The Wall Street Journal also leveled severe criticism at Bush’s fumbling in economic policy, raising worries over unprecedented level of fiscal and trade deficits.

In a recent article, the newspaper dubbed as “Reaganomics 2.0” the latest phenomenon that the “Reaganomics” was back in full swing as the prevailing global economic operating system. The kernel of the Reaganomics is strong support for tax cuts.

The tax-cutting policy has evolved into an economic philosophy since the ideology conforms to the “human being’s nature to value much of incentive.” A tax cut immediately hurts the state revenue but may boost the budget in the long run by facilitating the incentives of economic activities.

Tax cuts, a key pillar of the pro-growth Reaganomics, have contributed considerably to the unusual boom of the world’s largest economy in the 1980s. Korea has faced mounting calls for tax cuts since the government announced its national budget plan for the year of 2008.

Distribution-Oriented Revenue

The Finance and Economy Ministry announced its state budget plan for next year on Sept. 14. Next year’s state revenue was set at about 165.6 trillion won, up 4.6 percent or 7.3 trillion won from this year’s estimate of 158.3341 trillion won.

The budget was based on the assumption that the nation’s real GDP would grow 5 percent next year. According to the state revenue plan, corporate income tax, inheritance and gift tax, and comprehensive property tax aimed at the owners of expensive real estates will surge while income tax for wage earners will see only a marginal increase.

The slower growth rate in wage earners’ income tax is seemingly a result of the upward adjustment of income brackets designed to prevent the so-called “tax bracket creeping.” The 2008 budget plan well demonstrates that the Participatory government’s tax policy is highly focused on wealth distribution.

This year’s corporate income tax is estimated at 33.9 trillion won, surpassing 30 trillion won for the first time. Next year, the corporate tax is expected to increase 6.3 percent year-onyear to 35 trillion won. The growth rate is far above the estimated GDP growth rate of 5 percent for 2008. Next year, the corporate tax is projected at about 36 trillion won, up 22.6 percent from the actual tax revenue of 29.4 trillion won collected in 2006.

In the same period, the state tax excluding corporate tax expanded by 19.2 percent. Since 1995, Korea lowered the corporate income tax three times. The first adjustment came in 1996, with the tax rates of 18 percent for income tax below 100 million won and 30 percent for those above the benchmark were slashed by 2 percentage points to 16 percent and 28 percent, respectively. Additional tax cuts were carried out in 2002 and 2005.

The current tax rates are 13 percent below the benchmark 100 million won and 25 percent above the level. An empirical study shows insignificant impact of tax cuts on the total amount of collected corporate tax income over time. This is because the actual collection of corporate tax is more dependent on the economic conditions than tax rates. The past records of corporate tax collection shows that the total amount of the taxes increased in two or three years later after a tax cut.

More specifically, when the corporate tax rates were cut by one percentage point in 2002, the total corporate tax revenue stagnated till 2004 and then surged by 20 percent in 2005. The weight of corporate income tax out of the entire state tax revenue also shows a similar pattern. After a cut in 2005, the proportion of the corporate tax fell to 21.2 percent in 2006 but will likely improve to 21.7 percent by next year.

If the corporate tax rates are kept intact at the current levels of 13 and 25 percent, the collectable amount will surge in one year or two, putting heavy pressure on enterprises and dampening the nation’s growth potential. Another problem is that most local companies feel their tax burdens too high. “Effective corporate tax rates,” which divide corporate tax payment by taxable earnings, jumped from 16.29 percent in 1996 to 24.25 percent in 2003.

The indicator as a ratio is determined by the size of a denominator and a nominator. But unless there is obvious evidence that proves the pre-tax corporate profits have sharply contracted, the surge in the effective corporate tax rates suggests the corporate tax burdens have increased over time.

Global Tax-Cutting Competition

Global Tax-Cutting Competition Compared with foreign countries, Korea’s effective corporate tax rates are similar to those of the key OECD members (around 25 percent) but 10-15 percent higher than those of Singapore and Taiwan.

In a world of intensified global competition where capital crosses the borders with few hurdles, higher effective corporate tax means lower level of “national attractiveness.” The unfavorable taxation system will eventually serve as an entry barrier for foreign investors. In this context, we need to carefully review whether our corporate tax rates are appropriate and acceptable. A number of countries in Europe, Asia and other continents have been embroiled into cutthroat competition for tax cuts.

Ireland is a good example of success as the country has achieved a 12.5 percent growth rate on annual average after carrying out a major corporate tax cut in the mid-1990s. New French President Nicolas Sarcozy has committed himself to slashing the corporate tax rates to around 20 percent within next five years from the current 34.4 percent, a bold move praised as a “revolution.” Spain plans to additionally cut the effective corporate tax rates to 30 percent next year after slashing them to 32.5 percent from 35 percent this year. The Netherlands and Denmark rushed to undercut their effective corporate tax rates to 25.5 percent and 22 percent from 29.6 percent and 28 percent, respectively.

In Asia, Singapore is set to lower the corporate tax rates to 18 percent from the current 20 percent. Malaysia will also reduce its corporate tax rates by one percentage point both in 2007 and 2008 to 16 percent. Hong Kong is mulling over a proposal to slash the corporate tax rates to 12.5 percent from the present 17.5 percent. When each country carries out a corporate tax cut, one of the most agonizing problems is a consequent decline in tax revenue.

Most governments attempt to offset the deterioration in the fiscal budget by raising indirect taxes such as consumption tax or value added tax. Germany hiked the value added tax rates by 3 percentage points in return for lower corporate tax rates. Singapore also raised consumption tax by 2 percentage points. Their intention was to use indirect taxes occasionally borne by every individual as a major source of income while lowering corporate tax rates directly linked to the firms’ competitiveness.

This trend has become popular as many governments have realized that what’s the most urgent in their efforts to create more jobs and bolster the economic growth is to improve the local firms’ competitiveness and that one of the effective ways is to reduce their tax burdens. The strategy of low corporate tax rates can also be a “carrot” for foreign investors who would help improve the job market conditions and sustain the economic growth. A policy combination of “small government and big market” makes this task possible.

Running Against Global Trend

What about Korea? The Korean government believes that “it has many jobs” in the face of growing demands for social services in the welfare area amid the fastchanging society. To finance the social demand, the government is set to rake in huge money by raising corporate tax, inheritance tax, and comprehensive property tax. In other words, they are moving water to “the spring of the poor” from “the spring of the rich.” But the spring of the rich is not drying up and that of the poor is not filling up because the “bucket” carrying the water, which is the government, has many holes.

The nation’s cabinet approved a series of proposals to beef up the number of government bureaucrats for eight consecutive weeks from June 19 till August 14. Critics blatantly call Tuesday when the cabinet holds a weekly meeting as “a day to hire additional civil servants.” The number of government employees has steadily increased over the past five years since the beginning of the current Participatory regime. According to an “official bulletin about the government employees under the administrative body,” the government has so far hired as many as an additional 36,000 civil servants since President Roh took office in 2003.

Taking into account that the 30,000 vacancies left by Korea Railway who gained independence from the government in 2005 were filled up, the actual increase amounts to 70,000. This year alone will see an additional 14,000 new hires. The government who faces an end to its term is “doing the best” to expand the bureaucrats.

Lower Corporate Tax

The Participatory government’s taxation policy is based on the “Vision Korea 2030,” a welfare program with a budget of 1,100 trillion won. The governmenthas rejected the just and righteous demand for lower corporate tax and stuck to its rule of the game that “the affluent people should bear more burdens.”

The logic behind the socialistlike stance is that the distribution policy is essential to its efforts to narrow down the huge discrepancies between the rich and the poor. However, the government should bear in mind the fact that an excessive distribution policy that ignores market principles has a risk of increasing “the uncertainty of the economy.”

You may lose both growth and distribution at the same time. The real welfare program starts from a system that makes more “decent jobs” available. The demand for lower corporate tax should not be blamed as a selfish move to seek for only “the interest of enterprises.” Such a perspective only manifests that the government has a very short sight in its policymaking.

The writer is the dean of the college of social studies at Myongji University and president of Citizens United for Better Society. This article has been contributed by the Center for Free Enterprise.

By Cho Dong-keun