Personal welfare, personal taxes

The row over a hike in income taxes has spilled over to the corporate tax. More people are saying that financing for increased social welfare should come from the rich, large companies instead of middle- and working-class taxpayers. But this argument is wrong. It would be convenient to dump the new burden of financing welfare costs on big-earning companies. But at the end of the day, the working and middle classes would have to pay the price.

The immediate damage would go to stock investors and company employees. Let’s presume heavier taxes are levied on big corporate names like Posco and KT. Because of increased tax payments, companies would have lower dividends to pay shareholders and their stock prices would be hurt. Incentives and bonuses to employees would have to be scaled down, as would their raises. It would be shareholders and employees who eventually shoulder the higher tax bill. Companies owned by family owners are no different. Even though owners dominate 99 percent of the business conglomerates with just a 1 percent stake, they also take home 1 percent of the profits. Their share in a tax hike would also amount to 1 percent. The remaining 99 percent would have to come at the expense of other shareholders and employees as well as others doing business with those companies.

What’s most worrisome is the effect on investment. A higher tax burden would suppress investment and productivity, which would take its toll on job figures. Economic activity and growth would slow, hurting retailers - big and small - and freezing overall spending.

Some critics say corporate taxes and investment are unrelated, which is incorrect. That higher corporate taxes translate into reduced investment has been repeatedly confirmed in empirical studies by economists. The damper from corporate taxes can be greater in companies where capital mobility is high, because capital movement can be sensitive to small changes that could affect profits. That is why companies that have a high share of foreign investors and which raise funds mostly in overseas markets would be more shaken by an increased tax burden; it could hurt investment plans the following year.

A similar argument can be made for countries. Small countries and markets are more sensitive to capital movements than larger ones. The correlation between corporate taxes and investment becomes bigger. These countries must consider such factors when designing tax codes. Small countries need to raise more tax revenue from sales or income taxes instead of corporate taxes in order not to hurt economic growth.

Sweden is a good example. Sweden’s tax burden was 46.4 percent in 2009, nearly double Korea’s 25.6 percent. But the corporate tax rate is similar to ours at 22 percent. In sum, the amount is smaller. Sweden’s share of corporate tax revenue in gross domestic product is 3 percent, lower than Korea’s 4.2 percent. Sweden’s famous social welfare programs are financed by a value-added sales tax and individual income tax. Sweden’s maximum rate of personal income tax is 57 percent, 1.5 times more than Korea’s, while the highest rate of value-added tax is 25 percent, 2.5 times higher than Korea’s. Because the country is well aware of the negative impact on the economy from higher corporate taxes, it levies a higher tax burden on individuals. If the Swedish people had not agreed to high levels of universal taxes on consumption and income, they could not enjoy universal social welfare benefits.

We call for a universal welfare system yet want large companies to pay for it. Large companies are already paying tax bills similar to or higher than North European welfare states. It does not make economic sense to make them pay more. If we want universal welfare, we all must pay for it. Otherwise we should settle for welfare programs for the needy only.

Translation by the Korea JoongAng Daily staff.

*The author is a professor at Yonsei University and head of Freedom Factory.

By Kim Chung-ho