What happens if corporate tax revenue falls?

Lee Sang-ryeol
The author is an editorial writer of the JoongAng Ilbo.

This year can imply the ramifications on the South Korean economy when big companies stumble.

When outlining this year’s budget last month, the Ministry of Economy and Finance (MOEF) projected this year’s tax revenue would be short by 59.1 trillion won ($43.7 billion) from the estimated 400.5 trillion won. The two biggest shortfalls come from transfer tax — 12.2 trillion won or 41.2 percent off from the early estimate — and corporate tax — off 25.4 trillion won or 24.2 percent down. The revenue reduction from transfer tax is largely owed to the sluggish real estate market. Since the decline resulted from falling real estate prices, the outcome cannot be considered all that negative.

However, the drop in revenues from corporate tax is a different story, as it represents alarms on the Korean economy. Simply put, companies have not earned enough. According to the MOEF, the operating profit of listed companies totaled 81.7 trillion won in 2022, a 31.8 percent decrease from 119.7 trillion won in 2021. It could be worse next year. The operating profit of top 100 market-cap companies, excluding financial institutions, plunged by a whopping 63.5 percent on year in the first half. That foreshows a sharp reduction in revenues from corporate tax. Samsung Electronics — the longstanding No. 1 corporate taxpayer — reported a meager operating profit of 1.3 trillion won in the first half, tumbling as much as 95 percent from a year-ago period.

President Yoon Suk Yeol’s first agenda on economic policy a year ago was to cut corporate tax. But it flopped due to vehement opposition by the majority Democratic Party (DP). The government first proposed to lower the maximum corporate tax rate to 22 percent from 25 percent, but it had to settle for a 1-percent cut instead because the DP resisted the easing of “the tax for the rich.”

DP leader Lee Jae-myung even challenged Prime Minister Han Duck-soo to give up a “tax cut for the super-rich,” as it “goes against the principle and can deepen wealth polarization.” In 2021, companies subject to the maximum tax rate totaled 103, or 0.01 percent of the corporate sector. The 0.01 percent dubbed “super-rich” by the majority party was responsible for 41 percent of all corporate tax that year. But our national tax base has shrunk immediately after big companies showed poor performance last year and so far this year.

Tax revenue is not the only fallout. The job market fell into a deeper slump due to struggling large companies. The number of people employed in the manufacturing and construction sectors has extended a losing streak for eight and nine months, respectively. In particular, youth employment has been skidding for the 10th straight month.
The sluggishness cannot be entirely blamed on our thinning population. It owes more to a lack of jobs that can offer decent pay and welfare benefits. Job openings at large companies are getting scarcer. According to a survey by the Federation of Korean Industries on top 500 companies, 64.6 percent didn’t have any plans to recruit fresh college graduates in the second half — or decided not to hire them.

The freeze in the job market worsens when large companies give up recruitment. The troubles of large companies can jeopardize smaller companies that rely on their orders and partnerships. First-tier contractors to the five major carmakers total 740.

The economic war on the global stage has intensified amid the neo-Cold War between the United States and China. Key corporate players compete on the battlefield. Samsung Electronics and Taiwan’s TSMC vie in the foundry category, Hyundai-Kia against Tesla in the electric vehicle field, Samsung and Apple in the smartphone market, and LG Energy Solution, SK on and Samsung SDI are battling with China’s CATL over second batteries for electric vehicles. The Korean economy hinges on their performance.

We have to examine if Korea’s key players really receive the support their rivals like Apple, TSMC, Tesla and CATL get from their governments. Many lawmakers are still fanning an anti-conglomerate sentiment by framing large companies as being “super-rich.” The legislators do not appreciate their contribution to the country through hiring and investment. They also turn a blind eye to the fact that thousands of minority shareholders in big companies are common citizens. They oppose any government support for big companies, citing it as a privilege. Instead, they champion a myriad of regulations that fall far behind global standards. If they really care for the livelihood of the people, they must stop their regressive approach.