Higher taxes hurt everyone
Increasing taxes on corporations has reemerged as a political challenge as the government and National Assembly struggle to come up with funds to sustain welfare programs. Polls overwhelmingly show the public wants corporate taxes raised first, if tax increases are necessary to pay for welfare programs. But the government and business sectors worry the move could further dampen investment sentiment and slow economic recovery.
The dispute over welfare and taxes has boiled down to the corporate tax rate. Recent polls show the public favors corporate tax increases over hikes in value-added or income taxes. The public tends to think that because companies are richer than individuals, they can afford it.
A company is an instrumental conduit that delivers earnings to shareholders, employees, and consumers. Any change in income tax affects all participants in corporate activities.
One study showed that a when there is a 100 won (9 cent) tax on corporate income, 20 won is shouldered by consumers, 30 won by employees and 50 won by shareholders. Considering the share ownership ratio, the burden on the so-called rich and main shareholders amounts to just 25 won. The share for large shareholders can become even smaller if they hide income offshore. When corporate taxes go up, therefore, the burden is felt more by consumers, employees and minority shareholders. Higher corporate taxes do not help alleviate income disparity.
The downside to a corporate tax increase can be big. It can impair economic efficacy. Even if additional revenue from the tax hike goes straight to welfare beneficiaries, social losses are inevitable. As is the case with all taxes, corporate tax can evaporate in the air through a distortion in market prices without reaching the hands of individuals or the government. A study estimated that funding for the four universal welfare programs - child care, school lunches, allowances for low-income senior citizens, and subsidies for college tuition - will cost 85 trillion over the next three years.
If these funds come from corporate taxes, the social cost could reach 151 trillion won. Even considering welfare funds to households, about 66 trillion won in public funds could be lost. Because tax revenues have been declining due to the slow economy, the government then would have to ratchet up tax rates in order to sustain regular expenditures. We would find ourselves in a vicious cycle of slow economy, low tax revenues and high taxes.
From a capital perspective, corporate tax rates should be lowered further. Corporate taxes represent the second-highest share of national tax revenue among Organization for Economic Cooperation and Development members, excluding Norway. We rely more on corporate tax revenue than most other countries. Capital tends to follow higher returns. This is why countries are in competition to bring down corporate tax rates to attract capital.
Foreign investment in Korea amounts to $12.2 billion, just one fifth of the $63.7 billion in Singapore. Given the size of its gross domestic product, Singapore attracts 21 times more foreign investment than us. Singapore levies a corporate tax rate of 17 percent. The comparatively high corporate tax levy is one reason foreigners are not keen on investing in Korea. Investment is made after comprehensive consideration of a range of factors, including labor quality, employment flexibility and regulations. To draw more foreign investment, the government should lower taxes and improve other environmental conditions.
Corporate taxes should no longer be considered a means for income redistribution and source of revenue. We must do away with the outdated belief that corporate tax is a levy on big companies and large shareholders and therefore justified. The onus goes more to consumers, employees and minority shareholders. The higher the tax rate, the less tax the government can collect from companies.
Most other countries do not consider corporate tax as a tool for income redistribution and instead are making the rates cheap to draw foreign capital and bolster economic activity. We should follow the global trend and try to boost growth and tax revenue through a better investment environment.
Translation by the Korea JoongAng Daily staff.
*The author is the head of public policy research division at Korea Economic Research Institute.
BY Cho Kyung-yeop