Unification tax troublingPresident Lee Myung-bak attempted to raise public awareness about the possibility of unification with North Korea by proposing a new tax as a realistic step toward financing such an event.
He put the idea of a “unification tax” on the table to generate broad discussions on the issue in various corners of society. It is not the first time the idea of instituting a tax to finance the huge costs tied to unification has been floated. The Korea Development Institute, a state-run think tank, first proposed it in 1991 and has discussed it further at the private level. Now the government will officially study the feasibility of the idea and examine the specifics that would make it work effectively.
Scholars generally agree on the concept and the need for financial preparation ahead of unification, but many believe it is too exacting to put into action. Creating a new tax with a special purpose could pave the way for protests from taxpayers. Taxes for a single specific purpose are rarely found in advanced societies. We already abolished a tax with the objective of financing defense costs and are now discussing scrapping the education tax, too.
Furthermore, no one can accurately estimate the cost of unification. Estimates from foreign institutes vary widely, ranging from tens of billions of dollars to as much as $5 trillion.
The current administration uses the German unification experience as a point of reference. But Germany levied taxes ranging from 5.5 to 7.5 percent of income. The country also discussed the cost for unification. The actual taxing, however, took place after the event occurred. West Germany did indeed raise $10 billion annually for a decade, but it was more like our inter-Korean economic fund than an extensive tax.
Governments usually issue large-scale sovereign bonds in order to fund sudden catastrophes. Issuing such a massive amount of debt is possible only when it is backed by a strong fiscal state. However, it is not economically smart to bolster savings unnecessarily in advance when the economy cannot cope with it.
Readying the people for possible unification is an attractive idea. But taxing them is a different matter. The government has been incurring massive deficits due to various tax cuts and major infrastructure projects following the global financial crisis. It is not the right time to raise the idea of a unification tax.
We want to positively interpret the president’s comments by taking a longer-term perspective. But for now, a sound fiscal state is the key to funding unification. The government should first practice austerity. Only then it can gain the backing - and understanding - of the public.