An ill-timed tax hike

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An ill-timed tax hike

With the president facing criminal charges for corruption and the government and ruling party in a state of dysfunction, the opposition camp has decided to push for a corporate tax increase as a subsection in the bill for next year’s budget.

A bill subsection can be put to a vote under the authority of the National Assembly speaker and passed after gaining a majority vote by lawmakers. Given the current makeup of seats in the legislature, the opposition can railroad it through.

Under the plan, the highest-tier corporate tax rate will increase to 25 percent from the current 22 percent. But this move will do more harm than good. The opposition reasons that a hike could help finance next year’s 400 trillion won ($340 billion) budget.

A growing social welfare budget demands higher tax rates. It would be better to raise taxes and collect legitimate money from companies instead of squeezing money discreetly out of companies, which could lead to shady deals.

Still, the timing is poor. Korea Inc. is saddled with a double whammy of a prolonged economic slump and weakening competitiveness. Revenue of the country’s 12,000 largest companies shriveled to 2011 levels last year and has fallen for two years in a row. Slow-paced growth of under 3 percent is likely to go on for a third year in 2017. A higher tax burden on large companies could impair national competitiveness. Corporate taxes in most of the world’s 10 largest economies have been pared down since 2008 and are dropping further.

U.S. President-elect Donald Trump promises to nearly halve the corporate tax rate to 15 percent from the current 35 percent. If taxes increase, foreign companies will hightail out and local players could follow suit.

The politicians are wrong to point to the cash hoard being held by large companies. Reserves mostly exist in accounting books, and more than 80 percent is set aside for the purchase and expansion of facilities as well as other investment activities. If companies use up the reserves to cover more taxes, they will hire and invest less. The higher cost could also translate to higher prices for consumers.

It is more reasonable to raise the efficacy of the tax system by removing various exemptions and deductions. A higher tax rate can come after the economy has become stronger through restructuring.

JoongAng Ilbo, Nov. 25, Page 34
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