The Pitfalls of Targeted Corporate Tax Hikes

The National Assembly has raised the marginal corporate income tax rate. By creating a new tax bracket, it increased the top rate from 22% to 25% for companies with taxable income exceeding 300 billion won. The aim is to boost total corporate tax revenue by raising the progressive corporate tax rate.

At a time when tax credits have already been reduced, raising even the nominal tax rate is likely to sharply increase companies’ effective tax rates. Korean firms already bear a considerable corporate tax burden. Corporate tax revenue rose from 45 trillion won in 2015 to 52 trillion won in 2016. This year, it is expected to exceed 60 trillion won. Even so, if the top marginal rate is raised further, the tax burden companies must bear will climb even more steeply.

Unlike Korea, countries around the world are cutting corporate tax rates. In the United States, the Senate passed a tax cut bill that would lower the top rate from 35% to 20%, a reduction of 15 percentage points. Japan has also pledged to reduce its average effective tax rate from 29.74% to 20%. EU countries such as the United Kingdom and France have either already lowered their rates or are in the process of doing so. In this way, governments around the world are competing to cut corporate tax rates in order to attract capital and increase employment.

The corporate tax hike is also a significant departure from the policy direction of past administrations. Under the administrations of Kim Young-sam, Kim Dae-jung, Roh Moo-hyun, and Lee Myung-bak, corporate tax rates were continuously lowered. The downward trend, which came to a halt under the Park Geun-hye administration, has now turned into an increase.

Calls to raise the progressive corporate tax rate rest on a misunderstanding of corporations. People often say that corporate tax is a tax borne by corporations, but corporations are not people. The parties participating in transactions through a corporation are the ones who ultimately bear the tax.

In reality, a corporate tax increase passes the burden on to subcontractors, workers, consumers, and others. The reason is simple. The economy is a complex system in which countless stakeholders are intricately connected and interact with one another, so the burden of corporate tax is shifted through economic transactions. In other words, to offset the heavier tax burden, firms will try to lower supply prices, reduce employment, or cut labor costs. They may also consider raising product prices.

A corporation is a cooperative body made up of various stakeholders. Consumers, workers, and trading partners carry out their economic activities through firms. The only difference is that large firms involve transactions by many consumers, while small firms involve transactions on a smaller scale.

The scale of a corporation’s profits has nothing to do with the size of the individual incomes of those engaged in the transactions. There is no reason to impose a higher tax rate on cooperative activity simply because more stakeholders are involved. Nor is there any reason to distinguish and discriminate among those engaged in transactions based on which company they deal with. That is why most countries operate a single-rate corporate tax system. Even where progressive rates exist, they generally do no more than narrow the gap between taxation on small profits and tax-exempt treatment.

This increase can be described as a form of “targeted tax hike” aimed at companies with taxable income exceeding 300 billion won, which makes the seriousness of the problem all the greater. In particular, because it stems from a misunderstanding of corporations and runs counter to the international trend, its side effects are likely to be even greater.

Fortunately, our government has publicly pledged to drastically ease regulations going forward and create a business-friendly environment, so it is expected to reduce the adverse effects of higher corporate taxes. President Moon Jae-in also pledged during the presidential campaign to abolish quasi-taxes, so there is reason to expect the ever-growing burden of quasi-taxes each year to decline.

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

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Original title: 법인세 핀셋증세의 함정

Author: Sung-no Choi

Date: 2017-12-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=27&idx=10791