[Column] Solving the corporate tax puzzle

Suh Kyoung-ho

The author is an editorialwriter at the JoongAng Ilbo.

Many are frustrated with the legislature these days. Corporate tax is the biggest sticking point among rivalling parties. The government and the People Power Party (PPP) propose lowering the maximum corporate tax rate to 22 percent from current 25 percent. But the majority Democratic Party (DP) opposes the move, claiming it to favor rich companies. Proponents argue that Korea’s maximum corporate tax rate should be lowered because it is above the average of OECD member countries and in order to stimulate investment, raise corporate competitiveness by saving cost, and draw more foreign investment. The critics question the effectiveness of the tax cut as most of the benefit went to large companies in the past.

Academics are equally mixed. A report by Korea Development Institute (KDI) argues that a cut of the corporate tax rate by 1 percentage point can bump up investment by 0.46 percent, employment by 0.13 percent and real GDP by 0.21 percent. But opponents say data show that companies did not increase hiring, investment, wages or dividends when corporate tax came down under President Lee Myung-bak. The conservative government under President Park Geun-hye even imposed a tax to collect excess corporate profits in 2014.

In principle, I support a corporate tax cut. Corporate tax directly affect competitiveness. Tax cuts can help corporate activity and benefit the economy in the mid-to-long term. That is economic basics. But whether the cut should be made now is disputable. A tax cut is fiscal stimulus and goes against monetary tightening by the Bank of Korea to tame inflation. An economy facing multiple whammies require a team play. Decoupling of fiscal and monetary policy cannot bode well for the economy. The government estimates 13.1 trillion won ($10 billion) in reduced revenue, including 6.8 trillion won from corporations, from its revised tax code.

National Assembly Speaker Kim Jin-pyo came up with a compromise outline proposing that the DP accept the corporate tax cut while implementing the tax cut two years later. Another outline proposed a lesser cut and a longer grace period.

National Assembly Speaker Kim Jin-pyo bangs the gavel in a legislative session, Dec. 11. Amid a conflict between the People Power Party and the Democratic Party over the government’s plan to cut corporate tax, he proposed to accept the cut while delaying its implementation for two years. [YONHAP]

The PPP has responded positively to the compromise measures. But the DP remains steadfast. The liberal party needs to pay heed to the compromise proposal by Kim, a tax expert. Kim had served as tax policy chief at the Ministry of Finance and Economy under President Kim Dae-jung and finance minister under the following President Roh Moo-hyun.

Kim’s proposal has several merits. First, it can avoid the mismatch between monetary tightening and more spending. The International Monetary Fund (IMF) found Korea’s fiscal policy expansionary this year. As high prices are expected to continue for a while after next year, a corporate tax cut while price pressure is high needs to be avoided. For corporate tax, timing is important.

Second, much of the uncertainty over the disputed cut can be removed. If the government’s plan to cut corporate tax is fixed, companies can better design their investment plans accordingly. It also can send a message that the government is shifting policy friendlier toward businesses.

There is no need for political framing. When the Roh administration introduced the comprehensive property ownership tax in 2005, it divided the nation into the select property-rich taxpayers and the broader population. Such a divisive framework should be avoided. The DP should accept the house speaker’s compromise while conditioning the discussion on longer-term tax raise. The government and PPP that cannot easily move to raise taxes after a cut in fear of losing votes also could go along with the idea. Such an act also befits the DP with governing experience and a future chance of redeeming governing power.

Along with tax cut, the government and legislature must work to create a better environment for doing business. Multinational companies weigh tax benefits as well as the regulatory environment, labor resources and business climate in making investment decisions. An ability to politically solve social conflicts is also important. But sadly, such capabilities for now cannot be found at the current National Assembly and the government.