We Want a Competent Government That Excels at Capital Accumulation

One of the government’s most important tasks is to increase capital. A government can be recognized as successful only when it delivers results in that area, and only then can our economy develop. Yet all too often, we have had to watch governments preoccupied with suppressing capital.

The best way to increase capital is to create an environment in which the private sector can operate. Capital accumulates as a result of voluntary private transactions. Capital built up in this way supports people’s economic activity, raises productivity, and creates a virtuous cycle of higher incomes. The government should, above all, establish institutions and policies that make it easier for people to engage in economic activity.

Capital accumulation and taxation are closely related. If tax policy is mishandled, capital will not accumulate. Taxation of businesses is therefore a very important issue.

If a company with transactions of 10 billion won earns 1 billion won in profit, and a company with transactions of 100 billion won earns 10 billion won in profit, then the two companies have recorded the same rate of return. Yet to look only at the amount and say, “You earned 10 billion won, so pay more tax,” is to obstruct capital accumulation and suppress business growth.

A company is a cooperative community of many people and the sum of many transactions. It should not be penalized simply for being large. Since many people were involved in earning 10 billion won, it is wrong to impose more tax based solely on the total amount.

One should not assume that a company is making a lot of money simply by looking at sales. Apple’s net profit margin reaches 30–40%, while Galaxy’s is around 5–10%. Even if Galaxy sells more than Apple, its profits may be lower because its margins are smaller. That is why it is wrong to impose a progressive tax based only on the amount. It is also wrong to make simple comparisons between different industries.

Whether sales are 1 billion won or 10 billion won, the same tax rate should apply. This is called a flat tax or proportional tax. Businesses can expand only when a flat tax, not a progressive tax, is applied.

When a company earns profits, it pays corporate tax. But when executives and employees, creditors, and stock investors receive their share of that money, they also pay income tax. In other words, after corporate tax has already been paid, double taxation takes place.

It is easy to think that the corporate tax and progressive taxation borne by large companies have nothing to do with ordinary individuals, but that is not true. All investors in those companies suffer losses as a result. Even so, investors do not raise many objections. Stock investors are usually seeking short-term capital gains, so they are not interested in receiving dividends through long-term investment. Only institutional investors with large sums invested tend to pay attention.

Because populist policies are popular, many citizens support high corporate taxes. The state finds it convenient because it can collect taxes from a few large firms, and the public likes it because they think their individual tax burden will be reduced. So the state wants to raise corporate taxes further. If it tries to collect more taxes directly from the public, resistance is fierce, but raising corporate taxes on businesses is relatively easy.

In a capitalist society where value is created through businesses, it is wrong to strengthen corporate taxation and impose disadvantages on them. An economy can hardly grow under policies that suppress capital accumulation or the use of capital.

There was strong backlash when the Yoon Suk Yeol administration lowered corporate taxes. Those advocating socialist policies oppose corporate tax cuts. Socialists are hostile to capital investors.

Every country has some socialist elements. The same is true of the United States and Singapore, but they are prosperous because those elements occupy only a small share. Korea also has socialist elements, but it has come this far because they are relatively less pronounced. We should reduce the socialist share even further than the United States or Singapore and become number one.

Capital has the property of being used most effectively when it is created by the private sector and utilized by the private sector. The government should be as capital-friendly as possible so that this characteristic of capital can be fully realized. Only when regulations are removed and interference is avoided can capital be formed and accumulated.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 자본 축적 잘하는 유능한 정부 원한다

Author: Sung-no Choi

Date: 2024-01-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=3&idx=26364