Let the money flow to households

Park Jong-kyu

One of the highlights of the new economic team’s policy outline is taxation to force companies to spend their excess earnings on investment or increased wages for employees or dividends for shareholders. It is part of measures to shake domestic demand out of sluggishness and accelerate growth in slow-moving economy. It is a new experiment compared to past stimuli actions. Choi has declared the economic team would have to pursue uncharted way in order to jump-start the economy. The authorities are attempting to experiment with untested methods because all the usual prescriptions have proven ineffective to cure the complications of our economy.

Real wages have been stagnant since 2008. Dividends have decreased and financial instruments yield little returns due to prolonged low-interest rate policy. What household gets from corporate activities - wages, dividends and interest rates - hit bottleneck and earnings from companies stopped flowing into homes to generate a benign cycle in the economy. Regardless of record-high corporate earnings, household economy remains in the dumps. Households that should save for the future are busy paying off their mounting debts and making ends meet. Companies who should invest are saving the money. They amassed cash riches to the excess because they have not reinvested in business, hiring, wages or dividends. As a result, the economy lost vitality because capital flow has been clustered.

To persuade consumers to spend, the government lowers interest rates to lessen their savings. The same principle must apply to companies. Incentives on corporate savings should be eased so that they can spend the extra money to invest and increase hiring. The taxation on internal reserves is designed to do that work. The government hopes companies will choose to increase investment, hiring, salaries and dividend payment to avoid the tax.

The corporate sector naturally cannot be happy about the new tax. It contends that it spends most of its cash reserves on investment already and retorts that it cannot do more. To the management, purchases in real estate properties, shares in affiliates, stock, deposits and bonds may be investment. But they do not appear in the national balance sheet that estimates the gross domestic product. What the government demands is meaningful investment in facility, construction, and research and development.

The business sector protests the move as interference in corporate management. The government cannot tell companies what to do with their retained earnings. Also, it claims the action is double taxation as the reserves are after-tax cash flow. Tax experts would agree. But the corporate sector has forgotten something very important. The government cut corporate tax rates in 2008 to help companies weather global financial crisis. Corporate tax on income exceeding 20 billion won ($19 million) has stayed at 22 percent from post-2008 level of 25 percent. The government defied numerous calls for hikes on argument that capital investment could help buttress domestic demand.

But companies have not repaid through hiring and investment. They only became cash-rich with astronomical savings. The corporate tax cut pared tax revenue by over 28 trillion won over the last five years. Salary-workers had to make up for the losses because the government scrapped tax deductions for general taxpayers. It is no wonder that anti-corporate sentiment is mounting against large companies that became super rich at their expense. Companies have abused their prerogatives and the government is right to take it back.

The economy has not been making meaningful growths for years. To get back on a solid growth path, the economy demands unprecedented actions. If companies cooperate, the economy has a chance to rebound. At the end, both households and companies could benefit.

Translation by the Korea JoongAng Daily staff.

*The author is a senior research fellow of the Korea Institute of Finance.

BY Park Jong-kyu