Korea to cut 'value-up' taxes, double foreign professionals by 2035 to revamp growth

Economy

Published: 03 Jul. 2024, 12:30 Updated: 03 Jul. 2024, 19:35

Korea to cut 'value-up' taxes, double foreign professionals by 2035 to revamp growth

President Yoon Suk Yeol announces the Dynamic Economy Roadmap and the Economic Policy Direction for the latter half of the year at the Blue House in central Seoul on Wednesday. [YONHAP]

The government plans to reduce corporate and inheritance taxes for companies in the "value-up program" and more than double the number of foreign professional workers in Korea by 2035 under a multiyear plan to revamp economic growth.

The Yoon Suk Yeol administration on Wednesday released its so-called dynamic economy roadmap, a multiyear initiative for a major structural overhaul, along with the biannual Economic Policy Direction and a comprehensive support plan for the self-employed and small business owners.

The ambitious dynamic economy roadmap outlines the Yoon administration’s short and long-term plans to revamp Korea’s growth engine, which has been sharply losing steam due to a shrinking population and low productivity.

While some assess that the plan rightly targets the inherent problems standing in the way of further economic growth, others are doubtful whether the support required from the next administrations will be consistent enough for the grand ideas to materialize.

Three pillars to stave off stagnant growth
The roadmap consists of three pillars: creating an innovative corporate ecosystem, ensuring fair opportunities and enhancing social mobility.

Under the plan, the government aims to enhance the market valuation of domestic companies through its Corporate Value-up Program, designed to resolve the chronic undervaluation of Korean stocks, to the level of countries classified in the Morgan Stanley Capital International global index as developed markets.

Starting in the latter half of the year, the government will slash corporate taxes at a rate equivalent to 5 percent of the increase in shareholder returns, which include dividend payouts and the cancellation of treasury stocks, for companies participating in the value-up scheme.

Moreover, the government will abolish the current inheritance tax regulation that levies an additional 10 percentage points on top of the 50 percent cap if the benefactor is the largest shareholder of a company. As such, the current maximum inheritance tax rate of 60 percent will be cut down to 50 percent.

The plan also includes scrapping the proposed capital gains tax, set to take effect next year, as promised earlier by the president.

Race to secure foreign talent
With Korea facing a steep population decline driven by the world’s lowest birthrate, the government also aims to secure talent in key sectors such as semiconductors, while also attracting foreign workers to the country.

The number of professionals from abroad will be upped from 72,000 as of last year to more than 150,000 by 2035 through an improvement in the visa system. More detailed plans on the revamp are to be outlined within this year.

Other plans include enabling foreigners to work in the homemaking and child care sectors and establishing a government body, namely a committee chaired by the prime minister, dedicated to attracting foreign talent.

Finance Minister Choi Sang-mok, center, speaks during a press conference on the Dynamic Economy Roadmap and the economic policy direction for the second half of the year held at the government complex in central Seoul on Wednesday. [YONHAP]

Work-life balance and social mobility initiatives

Mid- to long-term plans to ensure a sufficient work-life balance include changing some of the fixed public holidays to floating holidays.

Korea also aims to secure the world’s most expansive free trade partnerships by 2027 by striking additional free trade agreements (FTAs).

The country has signed FTAs with countries accounting for 85 percent of the world’s combined gross domestic product (GDP), second in the world only to Singapore at 87 percent.

To increase social mobility, which has been undermined by the growing wealth gap, the government aims to boost the labor force participation rate from the current 71.1 percent to 73.7 percent, the average among members of the Organisation for Economic Cooperation and Development, by 2035. The plan includes upping parental leave pay by 1 million won ($720) by next year.

In the latest Economic Policy Direction covering the second half of this year, the Ministry of Economy and Finance upped its projection for the country’s economic growth this year from the previous 2.2 percent to 2.6 percent, while keeping its inflation forecast unchanged at 2.6 percent.

About 5.6 trillion won has been allotted to suppress inflation and ease the financial burden on households by cutting taxes on imported food products, expanding the production of agricultural and marine goods and cutting food expenses for low-income households.

To spur sluggish domestic demand, which includes private consumption and investment, the government added 15 trillion won to the budget to boost public spending and relieve the financial burden on construction companies.

In a 25 trillion-won comprehensive support package dedicated to the self-employed and small business owners, who have been hit particularly hard by high interest rates and the slow recovery of domestic demand, the government expanded financial assistance with low-interest loans and electricity bill cuts.

“While the macroeconomic indicators, including the growth rate, have been notably improving, it is disappointing to say that the warmth [of the economic recovery] is yet to trickle down [to relieve the burden on] everyday livelihoods,” the president said during an economic policy meeting with top officials including ministers and cabinet members as well as the People Power Party's leadership at the Blue House in central Seoul on Wednesday.

“To fundamentally improve the everyday livelihoods of the general public, we will further strive to achieve sustainable economic growth,” Yoon said.

“Through the elimination of unnecessary regulations and the implementation of tax reform, we will build a foundation on which both companies and the people can achieve win-win growth.”

Questions about feasibility
With the big issues enmeshed in Korea's social and economic structure, the deadlines for the proposals extend as far as 2035, long after Yoon's term at the helm is over.

Another challenge is posed by the composition of the current National Assembly — dominated by the main opposition Democratic Party (DP), which will likely oppose many of the proposals.

"It remains questionable whether the proposals will go as planned even after Yoon's term ends," said Im To-bin, a professor at Seoul National University's Graduate School of Public Administration.

Most plans including those concerning taxes require approval by the National Assembly. Given that the DP is almost unanimously against the other ongoing reforms proposed by the Yoon administration, chances are slim that the plans get the green light from a majority of lawmakers.

"At a time when the government's push on three major reforms in education, labor and the pension system is in limbo, they throw in more long-term tasks," said Kim Sang-bong, an economics professor at Hansung University.

"The government should maintain a pace for the actual implementation of the plans," Kim said.

Update, July 3: Added details about the dynamic economy roadmap and the Economic Policy Direction plans, comments by professors.

BY SHIN HA-NEE, KIM KI-HWAN [shin.hanee@joongang.co.kr]