Chaebol reform goes too far

Local politicians are proposing excessive plans to reform chaebol. The main opposition Democratic United Party has announced a radical platform bent on complete elimination of the tax deduction benefit for conglomerates’ R&D, while the ruling Saenuri Party offered to totally ban cross-shareholdings among chaebol’s companies. The political circle explains that the move is aimed at getting rid of the negative effects, not positive ones, of the chaebol system. When those ideas are legislated, however, it will most likely liquidate all the positive functions of the decades-old industrial structure.

The DUP’s proposal, in particular, carries serious problems as it directly negates the importance of chaebol’s R&D. The party wants to scrap the tax deduction benefit just because chaebol’s effective corporate tax rates are lower than nominal ones. R&D is essential for our economic growth, national competitiveness and job creation. That’s why previous governments offered the tax benefits regardless of the size of those companies. Even in the multilateral trade negotiations like the Uruguay Round or free trade agreements, tax benefits for R&D have been accepted.

To win in the fierce competition with foreign business juggernauts, reinforcing our competitiveness through R&D is a top priority. The tax benefits for conglomerates are not a special favor but a tool for strengthening our economy. Therefore, the DUP’s ideas are totally populist.

The party should instead find other ways to reduce tax benefits than R&D. Also, it must reconsider its scheme to raise the corporate tax rate of the company’s income from the current 22 percent to 25 percent. If the rate rises to 25 percent, it not only goes against the global tide of competitively lowering corporate tax rates but also further widens the gap with our rival economies like Singapore and Taiwan. When our companies’ overseas investment dwindles and foreign companies’ investment in our market grows, politicians must mull what kind of advantage our economy can gain after the tax rate hike.

Of course, our chaebol system is not without problems, and chaebol owners’ greedy behavior should be corrected. But when the political circle’s efforts to reform chaebol go too far, it not only stifles normal business activities of the business groups but also wreaks havoc on our economy. If politicians don’t want it, they must pursue the reform incrementally and use common sense.