[Op-Ed] Lower Tax Rates Needed to Boost Growth; Corporate and Inheritance Taxes Should Be Cut

Controversy Over Revised Tax Code, Amended for the First Time in 25 Years, as It May Worsen the Fiscal Deficit

Higher tax rates hinder long-term economic growth and ultimately reduce tax revenue

High corporate taxes and punitive inheritance taxes encourage an exodus overseas

The government has announced a revised tax code that includes changes to the inheritance tax system for the first time in 25 years. However, the proposal has sparked controversy over concerns that it could deepen the fiscal deficit. South Korea is currently facing a projected “negative” fiscal balance for the second consecutive year. With fiscal deficits continuing, it is essential to find a better solution.

Raising tax rates is not an appropriate answer. Using higher tax rates to fill the fiscal deficit may have a temporary effect, but in the long run it hinders economic growth and ultimately reduces tax revenue. This is because high tax rates increase burdens on individuals and reduce corporate investment, weakening economic vitality. If the government chooses the long-discussed approach of lowering corporate and inheritance taxes to promote economic growth, it can address the fiscal deficit even with lower tax rates.

A cut in the corporate tax rate should be considered. Lower corporate tax rates can attract more capital from international capital markets, while also reducing the cost of capital domestically and creating opportunities for companies to reinvest. As firms expand their businesses and hire more workers, this will have a positive effect on the broader economy.

South Korea’s inheritance tax rate is excessive to the point that it can rightly be called “punitive.” The country’s top inheritance tax rate is 50%, and when the premium imposed on the shares of a controlling shareholder is added, the rate reaches 60%. The OECD average inheritance tax rate is 26%. There is even talk that NXC, the holding company of Nexon, South Korea’s largest game company, and Samsung, one of the country’s flagship firms, are being effectively nationalized because of inheritance taxes. Recently, more cases have emerged of people liquidating their assets and moving to countries such as Canada, Australia, and Singapore, where there is no inheritance tax. The reality is that companies, too, are rushing overseas in order to survive.

A reduction in the inheritance tax should be studied. Although inheritance taxes are said to be necessary to prevent the hereditary transfer of wealth and reduce social inequality, excessively high taxes make it difficult to sustain businesses and weaken competitiveness. According to the Laffer curve theory, tax rates above a certain level reduce the incentive to work and thereby decrease tax revenue. While there is debate over what that “certain level” is, rates as high as 50–60% clearly undermine the incentive to work. The current inheritance tax rate dampens companies’ willingness to grow and makes it harder for them to survive in global markets. South Korea therefore needs to lower the inheritance tax rate to protect corporate competitiveness and revitalize the economy.

Tax cuts can, in fact, be expected to increase tax revenue. One criticism of this tax code revision is that “the share of earned income tax has increased from the previous year.” However, this is not because individuals are bearing a heavier burden, but because the number of employed people and wages have risen compared with the previous year. If lower tax rates increase corporate profits, this can also lead to higher tax revenue from sources such as corporate taxes. If tax cuts are implemented in this way, business growth can generate higher tax revenue over the long term.

Closing tax loopholes and reforming spending to resolve the fiscal deficit are absolutely necessary. In 2023, about 300 cases of subsidy fraud involving government funds were reported and audited. The government must secure public finances by reducing unnecessary spending and reforming tax deductions. It should maintain fiscal soundness and pursue pro-growth tax policy through a sustainable tax system that does not increase burdens. Low tax rates that can promote economic growth should be maintained, and the resulting tax cuts can be offset through closing tax loopholes and reforming the structure of fiscal expenditures.

It is possible to address the fiscal deficit with lower tax rates. Lower tax rates can protect corporate competitiveness and raise the incentive to work, thereby leading in the long run to economic stability and higher tax revenue. For a sustainable tax policy, it is essential to maintain low tax rates while also making efforts to close tax loopholes and improve fiscal spending. That is because this can achieve both economic growth and fiscal soundness at the same time.

Ayoung Jeon, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 경제성장 촉진 위해 낮은 세율 필요, 법인세와 상속세 낮춰야 한다

Author: A-young Jeon

Date: 2024-11-27

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=27107