Wrongheaded approach

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Wrongheaded approach

Newly appointed Deputy Prime Minister for the Economy Choi Kyung-hwan plans to levy taxes on the money that companies have been reserving for the future or offer incentives to invest it or spend it on wage increases. That is aimed at raising household income - which the prime minister believes is a main cause of economic slowdown - to boost domestic demand and growth. At first glance, the idea sounds reasonable. However, forcing companies to spend cash reserves to increase dividends or wages violates the principle of a market economy and can hardly achieve the goal of stimulating consumption.

First of all, Choi seems to confuse the overall national economy with microscopic financial indices. Just because companies’ savings and household debt have increased doesn’t mean all companies stack up money or every household is ridden with debt. Coercing companies to reduce cash reserves to offer dividends or wage increases does not translate into an increase in household income or consumption.

Choi’s perception of companies’ cash reserves is misleading because they are only one of the capital items on the balance sheet, a reflection of money left after paying taxes and dividends. The vast majority of cash reserves is linked to property, and cash accounts for less than 20 percent of the overall capital items. The cash also is reserved for companies’ future investment or emergencies. Because the amount of cash reserves is proof of companies’ solid financial structure and investment potential, the government’s order to spend the money on dividends or higher pay doesn’t make sense.

Even if some large companies follow the government’s direction, its effect on boosting consumption would be minimal because only a handful of companies stack up cash reserves and the recipients of the dividends are mostly foreign investors, big shareholders and institutional investors. So it can hardly lead to increased consumption. Offering more bonuses to high-income earners in big companies will only exacerbate the polarization of wealth.

The government wrongly attributes stagnant household income to revenue increases in the corporate sector. Household income has slowed due to export companies’ lack of ability to create more jobs and because of the decline of self-owned small businesses since the foreign exchange crisis. Even if it may take longer, the deputy prime minister must find an answer to create more jobs, restructure self-employed businesses, deregulate industry and foster the services industry.

JoongAng Ilbo, July 18, Page 30

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