Raise the effective tax rate first

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Raise the effective tax rate first

The opposition camp has ramped up its push for a hike in corporate taxes. People’s Party Rep. Kim Dong-cheol submitted a bill proposing to raise corporate tax rates by 25 percent. The Minjoo Party also plans to motion a bill on the National Assembly floor to hike tax rates for large companies once it is done with negotiations on executive seats.

The opposition is calling for the normalization of corporate tax rates, claiming earlier cuts failed to stimulate capital investments and hiring. The government under President Lee Myung-bak brought down the top-bracket corporate tax rates by 3 percentage points in 2009 to encourage companies to use those savings to invest and hire more.

But the cut shaved tax revenue without boosting domestic demand. Fiscal deficits during the five years under Lee and three years under incumbent President Park Geun-hye piled up to nearly 200 trillion won ($172 billion). The opposition has grounds to campaign for higher corporate tax rates.

But restoring tax levies on large companies may not be a good idea under current circumstances. The economy is mired in a structural slowdown with conditions on both the domestic and foreign fronts turning from bad to worse.

With governments around the world struggling to fight deflationary pressure and recession, many have lowered corporate tax rates since the financial crisis in 2008. Of the 34 OECD member nations, 17 have cut rates versus six that raised theirs. Tax payments from companies have also has been on the rise. Increasing tax rates only could worsen political friction.

One plausible option is to raise the effective tax rate — the average levy on pretax earnings — for corporations. According to the National Assembly Budget Office, the effective tax rate on companies in the annual income bracket of 20 billion won and over averaged 17.9 percent, lower than the marginal rate of 22 percent.

Various tax incentives and cuts for research and development and promotion in hiring mostly go to large companies. Large companies accounted for 82 percent of total tax deductions. Sixty percent of the tax benefits went to the top 10 business groups. This is why some large companies were paying less in taxes than their midsize counterparts.

The talk of higher taxes on big companies is brewing because they do not pay taxes adequate for their earnings. Higher tax rates could still be considered after the effective rates are raised and yet fail to help alleviate fiscal imbalance and correct the gap between the large and smaller business sectors. Corporate taxes should also be revised under the broader review of tax codes, including income tax.

JoongAng Ilbo, June 8, Page 30
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