[Viewpoint] Economic logic versus politics

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[Viewpoint] Economic logic versus politics

North Korea’s surprise bombardment of Yeonpyeong Island near the maritime border has silenced political wrangling over the tax cut. But the hiatus does not nor should not mean an end to the debate. Taxes are the bedrock that will feed strengthened security awareness and national identity after the rude awakening of the North Korean threat.

Paying taxes is as obligatory for South Korean citizens as military service in their commitment to the country. Tax revenues finance a state’s operations and serve as a social safety net through wealth redistribution. Who and how people are taxed can determine the direction of a nation.

The tax system is therefore the yardstick gauging the level of equality in a society. While North Korea’s attack on Yeonpyeong underscored the necessity for strong security to uphold our nation, the tax controversy highlights the kind of society this nation should pursue.

The tax cut controversy was the result of President Lee Myung-bak’s campaign platform. He offered to cut taxes for individuals as well as companies to spur consumer and corporate spending, stimulate the economy and create jobs. His first finance minister, Kang Man-soo, was an outspoken proponent of the tax cut and pushed the proposal forward. The ruling party passed the government bill on scrapping a blanket real estate tax and a two percentage point cut in the income tax.

But to appease the opposition’s resentment against tax breaks for the wealthy, the ruling party agreed to a two-year deferment on the tax cut for individuals earning more than 88 million won a year and companies generating profits of more than 200 million won. Under the law, the cap expires at the end of this year and the tax cut to 33 percent from 35 percent for individual income taxes and 20 percent from 22 percent for corporate taxes should take place from Jan. 1.

That seemed to be the end of the story until a senior member of the ruling party re-ignited the debate. Rep. Chung Doo-un publicly demanded that the Grand National Party forsake the planned tax cut for the wealthy to underline the party’s commitment to shedding its moniker as a party for the rich in the next general and presidential elections. Various factions in the ruling party began to propose alternative ideas to replace the controversial tax break for the wealthy.

Faction leader and potential presidential candidate Park Geun-hy fanned the debate by presenting her own idea.

The talk has died down in response to the ongoing security crisis, but will likely resurface once the political race for the next election begins.

The tax cut is not such a difficult problem to solve if there is no political factor involved. Its involves a simple mathematical calculation of how much the economy will grow and how many jobs can be created and whether that will compensate for the loss of revenue from the tax cut.

The government maintains that the tax cut will eventually translate into increased tax revenues from accelerated economic growth. Won Yun-hi, president of the Korea Institute of Public Finance, cited cases in Germany, the United States and Britain to support the idea that cuts in corporate and individual income taxes lead to sustained or increased tax revenue.

Our own case is more explicit. The government has incrementally shaved individual income taxes from a peak of 62 percent in 1981 to 35 percent in 2005. But income tax as a share of the gross domestic product has increased to 4 percent in 2008 from 2 percent in 1981. If the government’s argument that tax cuts can stimulate the economy and generate more tax revenue has merit, politicians can agree to the plan or they can disagree if they can prove otherwise.

But the problem is that politicians do not approach the tax issue solely based on economic reasoning or empirical study. The ruling party is devoid of logical arguments to counter the opposition party’s emotional attack on a tax for the rich. Instead it has been swept up into the eye of the storm.

The conservatives appear weak against the criticism that they are providing a tax break for the rich, even though higher income earners provide the bulk of tax revenues and nearly half of blue-collar and self-employed taxpayers do not pay a cent. Rep. Chung is actually the most honest in claiming the “tax issue cannot be addressed with economic logic alone.”

If politics can not be removed from the issue of tax cuts, the government might as well confront the issue directly. It should come up with a substitute tax plan that can avoids the image of giving tax breaks to the rich. GNP head Ahn Sang-soo suggested dividing the tax brackets to create a new top income bracket for those who earn more than 100 million won a year. They would then be subject to the current top income tax rate of 35 percent. Corporate taxes could also be redefined to keep the current top rate for the biggest earners. Art is not the only field that demands creativity.

*The writer is an editorial writer of the JoongAng Ilbo.

By Kim Jong-soo
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