Study: Tax hike hurts corporate investments

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Study: Tax hike hurts corporate investments

While a heated debate ensues over whether the government should slap a higher tax rate on businesses, a study by the state-run think tank shows a rate increase wouldn’t be wise.

Corporate investments grew 0.2 percentage points when the corporate tax was slashed 1 percentage point between 2002 and 2014, according to a study released by the Korea Development Institute (KDI) Monday. A permanent tax cut of 1 percentage point would result in raising the corporate tax 0.29 percentage points in the short run.

“The reduction in the corporate tax could have a positive impact on corporate investment and production,” said Nam Chang-woo, a researcher at KDI. “Companies significantly expand their investments in response to a cut in the corporate tax rate, implying that an increase in the corporate tax rate could result in a reduction in investment with statistical significance.”

Under the Lee Myung-bak administration, corporate tax levied on businesses with annual revenue exceeding 200 million won ($170,970) was cut from 25 percent to 22 percent in 2009. The tax regulation was further loosened in 2012 as the Lee administration raised the ceiling for companies subject to the 22 percent maximum rate from 200 million won in earnings to 20 billion won.

The KDI report noted that lowering the overall corporate tax was more effective than loosening the taxable criteria. Between 2005 and 2008, a 1 percentage point drop in the corporate tax rate resulted in a 0.31 percentage point rise in investments. However, when the government loosened the criteria to 20 billion won, the investment grew just 0.06 percentage points.

The Minjoo Party has proposed applying a maximum 25 percent corporate tax on businesses with annual revenue exceeding 50 billion won. The People’s Party is requesting the maximum tax rate be raised from the current 22 percent to 24 percent. The Justice Party is proposing to simplify the tax code by splitting businesses into two groups: those who make 200 million won or less and those who make 200 million won or more, and levying a 25 percent tax rate on the second group.

The ruling party and the government have opposed such requests on the grounds that such action could only contract corporate investments and could have a negative impact on the nation’s economic growth, which is already struggling.

The KDI report also warned of management fraud undermining corporate investments. Korean managers had a higher tendency to use company profit for personal gain than other advanced economies.

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