[EDITORIALS]The Logic of a Corporate Tax Cut

Various measures to stimulate companies' business activities are being discussed.Voices calling for the government to play the proper role to boost domestic consumption, which now girds the Korean economy, are growing stronger.

The opposition Grand National Party has proposed that the government cut corporate taxes. The opposition party plans to present, in the current regular session of the National Assembly, a revised tax bill to cut corporate taxes and income taxes by 10 percent. The Grand National Party's tax bill is different from that of the government and the ruling Millennium Democratic Party, who plan to reduce only income taxes.

The most important reason why the government and the ruling party oppose a tax cut for corporations is that it would reduce the government's tax revenue. According to government estimates, if corporate tax rates were cut one percentage point, the government's annual tax revenues would decline by 730 billion won ($557 million). The Grand National Party's revised tax bill cuts tax revenues by around 1.5 trillion won. The government and the ruling party insist that a cut in corporate tax rates is too heavy a burden for the government because it is already facing a 1.9 trillion won revenue decline from a reduction in income tax rates. In addition, the government worries that it may be forced to break its promise of balanced finances in 2003.

We think this regular session of the National Assembly should discuss a corporate tax cut, considering the efficiency of the government's finances and recent events in the United States. The government has stressed that taxes on Korean companies are lower than the average rate of the Organization for Economic Cooperation and Development member countries. But developed countries, including the United States, have already begun reducing corporate taxes. The government should review tax cuts as well as an expansion of government expenditures.

Because there are a lot of uncertainties in the situation, the government needs to properly mix expansionary spending, whose effect is direct but limited, with a tax cut, whose effect is wide. Already, balanced finances in 2003 seems like a difficult task.