[VIEWPOINT]‘Tax bombs’ push capital overseas

The Wall Street Journal reported recently that Korean residents bought more than half of the 344 units of the condominium “Hudson Club,” in West New York, New Jersey in the United States, right across from Manhattan. This report made me think that things are finally happened as expected.
The capital outflow for these purchases is partially the result of the tax bombs the Roh Moo-hyun administration has lobbed at the wealthy.
Although the sale price for one unit ranged from $400,000 to $1.6 million, more than half of the Korean purchasers paid for them in cash. We don’t need to criticize the wealthy for purchasing overseas real estate. The problem is that these rich Koreans had plausible reasons to buy expensive condominiums in the United States.
First, an increase in the value of the Korean won, arising from the surplus in the international trade, has brought about the capital outflow. The United States is a safe place to invest.
Second, as South Korea started pursuing the liberalization of foreign exchanges in 1999 to be finalized in 2011, in accordance with the scheduled liberalization steps, an increase in overseas real estate investment starting this year had been predicted.
The liberalization of foreign exchange has been undertaken in three phases; we are now at the midpoint of phase three.
According to this measure, investment in overseas real estate will be liberalized between 2006 and 2008, and regulations on foreign exchange transactions will disappear between 2009 and 2011, as the existing foreign exchange law is abolished. Consequently, after 2011, an exodus of domestic capital could occur on a large scale.
Third, the tax bombs from the Roh Moo-hyun administration haveencouraged spending overseas.
In the name of “the resolution of income polarization,” this administration has taxed the wealthy heavily.
We can guess their explosive power from the effects of the comprehensive real estate tax alone.
Taxes are imposed on actual transaction prices of houses and land.
Standard appraisal prices for calculating house ownership taxes have been adjusted from the posted price of 900 million won ($938,000) to 600 million won.
After 2007, the transfer tax rate of houses will go up to 50 percent, and that of non-business empty house lots and farming land owned by non-residents, to 60 percent. The adverse effects of the comprehensive real estate tax are not just limited to these areas, either.
These three factors must have caused the Koreans to purchase the high-end condominiums in large quantities.
Particularly, the Roh administration’s tax bombs on real estate are accelerating the outflow of domestic capital.
In any country, the phenomenon of a tax shelter is bound to take place when the tax burden gets too heavy. Businesses or facilities move to a country where the tax burden is low in order to escape the high tax at home.
Isn’t now the global age? In a global age, it is a natural phenomenon for domestic capital to move abroad and for foreign capital to move in.
Advanced countries are currently competing to lower taxes, including the personal income tax and corporate taxes, in order to induce foreign capital.
In recent years, nine former socialist countries, including Russia, have even adopted a flat tax, which has worsened income distribution.
In Seoul and the surrounding areas, there are strict regulations for building new plants or expanding existing ones, due to concerns about development and the environment.
Because of this, Samsung Electronics will establish a plant in Singapore. The company is attracted by the country’s offer to exempt them from corporate taxes for 15 years.
But the Roh administration has pursued tax increases, contrary to the international trends.
As a result, it is worried that the number of tax shelters may continue to grow uncontrollably, which happened in Argentina in the 1970s to 1980s. Argentina has long failed to overcome economic instability.
That country recorded a negative growth rate as many as 13 times from 1971 to 2003. Accordingly, its per capita income has fluctuated seriously.
It is well known that in this process, the outflow of capital has played a great role.
Korea is also highly likely to fall into the trap of low growth like Argentina unless the country stops its outflow of capital.
Preventing the phenomenon of the tax shelter from happening in the global age is the overriding task of the Korean economy.

* The writer is a professor of economics at Dangook University. Translation by the JoongAng Daily staff.

by Park Dong-woon