1960s-style tax policy is outmoded

During Korea’s industrialization, companies led national growth with investment and hiring with substantial government incentives. But the export-oriented growth structure led primarily by large conglomerates no longer contribute substantially to hiring and now make wealth inequality worse. The number of employees needed to produce 1 billion won ($897,000) in added value plummeted to 19.4 in 2012 from 156 in 1970.

The economy has been moving along without generating meaningful new hiring, and yet the government maintains low corporate taxes in order to encourage corporate investment and hiring. It is even argued that corporate tax rates should be lowered further because of double taxation of corporate owners, a flight of foreign investors and the high corporate share in total tax revenue.

But double taxation is partly compensated for through deductions from dividend income. Foreign investors have also receive corporate tax exemptions for a stated period. The corporate tax share of total revenue remains high because of a concentration of economic power, the low rate of labor costs to gross production costs, and the gap between the maximum rates of corporate and personal income taxes.

The corporate tax rate for the highest income bracket is now 24.2 percent, a bit higher than the rates of 23 percent in Britain and 22 percent in Sweden, but still lower than the 37 percent rate in Japan, 39.1 percent in the United States, 30.2 percent in Germany and 34.4 percent in France. The actual tax bill is also comparatively smaller because local companies contribute less in social welfare donations and enjoy generous tax incentives and exemptions. According to a World Bank survey, Korean companies’ tax burden, including corporate tax and social welfare contributions, as a percentage of income is 29.8 percent, sharply lower than the 42.5 percent average of members of the Organization of Economic Cooperation and Development.

In China, the figure is 63.7 percent; in Japan 50 percent; in the United States 46.7 percent and in Germany. Both France (65.7 percent) and Sweden (53 percent) also show sharply higher tax burdens. Korean companies therefore cannot complain about taxes. The argument that Korea’s corporate tax level dampens the investment appetite of local and foreign companies is not persuasive.

There is no evidence that investment and hiring increased after corporate taxes were cut during the Lee Myung-bak administration. In fact, tax revenue from the corporate sector fell because the government did not change incentives and deductions for mostly large companies after it lowered corporate tax rates.

According to the National Tax Service, large companies received 71 percent of the value of deductions and exemptions in corporate tax revenue in 2011, up from 62 percent in 2008. Of 9.3 trillion won in deductions and exemptions in 2012, 78.1 percent went to the top 1 percent of firms. Yet investment and hiring by large companies remained sluggish. Recruitment in companies that employ more than 300 workers dropped to 8.3 percent of total new employment in 2012 from 8.4 percent in 2009. Large companies are cash-rich because they have not invested despite tax benefits. Cash reserves at the 10 largest business groups were 183 trillion won as of March 2012.

Companies drag their feet on investment not because of the tax burden. They refrain from spending because of foggy business prospects amid a global slowdown and poor domestic demand. In order to bolster domestic demand, the fruits of growth must be evenly spread out in our society. A higher tax levy on large companies and an aggressive government redistribution policy can stimulate domestic demand and lead to balanced and stable growth by narrowing the gap between large and small companies and permanent and irregular workers.

Translation by the Korea JoongAng Daily staff.

*The author is a professor at Inha University and head of the Center for Tax Reform at People’s Solidarity for Participatory Democracy.

By Kang Byung-gu