Can Korea tax itself to prosperity?
It’s a great idea, and one that some of Park’s peers in Asia should consider - including Japan’s Shinzo Abe.
Korea’s economy is dominated by family-run conglomerates, or chaebol. An uncertain global economy and an aging population at home have left them too averse to risk. Rather than share their swelling profits with workers or invest the windfall, executives are sitting on the cash. As my Bloomberg News colleagues in Seoul report, Samsung alone had the equivalent of $60 billion in cash and short-term investments at the end of June, dwarfing Apple’s $38 billion.
This miserliness is undermining national growth. If Park’s plan works, on the other hand, rising wages could chip away at the income inequality that has undermined household confidence in Korea and boost consumer spending. The tax may also be a savvy way to advance Park’s larger goal of chaebol reform. She’s pledged to curtail the influence of the corporate giants, whose smothering hold on the economy has stymied competition, innovation and job growth. Not surprisingly, the chaebol are fighting back aggressively, lobbying against regulations that would constrain their traditional ways of doing business. The tax gives Park something to bargain with.
Japan faces many of the same issues as Korea, but on a much larger scale. As of March, Japanese companies were holding a record $2.3 trillion in cash - a 4.1 percent increase from the previous fiscal year. That’s a near-lethal blow to “Abenomics,” a major element of which involves getting companies to increase wages and drive a virtuous cycle of rising consumption.
Abe’s revival scheme confronts a Catch-22: He needs companies to start spending in order to boost the economy, but executives are holding their fire until they see growth accelerating. A tax on excess cash like the one South Korea is eyeing might jump-start the process. Were companies incentivized to deploy those trillions, fatter paychecks should translate into greater demand for Toyota cars, Sony Playstations and Uniqlo sweaters.
Abe’s government could go even further and target excessive bond holdings. The problem isn’t unique to Japan - just ask Federal Reserve officials seeing most of the dollars they print stuffed into government debt rather than lent out. But as I’ve written before, Japan needs to disincentivize risk-adverse bankers from parking virtually all the central bank’s stimulus into short-dated government debt. Why not slap levies on excessive bond buying? Or offer tax incentives to banks that extend fresh credit?
What libertarians might see as bureaucratic meddling, Abe could sell as bankers paying it forward. The prime minister, after all, has been good to Japan Inc. He’s weakened the yen 18 percent in the last 20 months and worked to slash tax rates. His push to improve corporate governance is so loaded with loopholes that executives are rejoicing. Abe’s move to nudge the $1.2 trillion Government Pension Investment Fund to buy more Japanese stocks will bail out the least proactive and creative CEOs. Why not demand something in return? In return for what amount to considerable corporate-welfare perks, Abe should be able to expect companies to share their wealth with workers.
The first two of the three arrows that comprise Abenomics - monetary loosening and fiscal stimulus - were met with limited success. The reason: The “third arrow” of structural reforms remains in the quiver, not least because the most urgent changes are also the most difficult politically.
If penalizing cash hoarders with a tax spurs corporate spending and higher wages, confidence among Japanese workers and consumers should improve. That in turn might soften voters’ resistance to other reforms. If nothing else, a little corporate shock therapy is worth a shot.
*The author is a Bloomberg View columnist based in Tokyo.
BY William Pesek