Beginning this year, the top corporate tax rate on companies, whose taxable income exceeds 300 billion won, has been increased to 25% from 22%. Accordingly, 77 major companies will have to pay 2.3 trillion won more than before. Korea’s corporate tax hike clearly counters the global trend as other countries, including the United States and Japan, are moving to cut corporate tax. The U.S. decided to slash the rate to 20% from 35%. Japan is also following the trend, cutting the corporate tax rate to as low as 20% from 29.97% as incentives for innovative companies. The purpose of the Korean government’s decision to push ahead with the increase, while even defying such an international trend, can be interpreted as a pursuit of creating jobs from increased tax revenue. However, whether its vision will be able to see through to the end is highly questionable and the risk that the corporate tax increase could backfire cannot be ignored.
First, the corporate tax increase will undermine investment which in the long run, will lead to a decline in the international competitiveness of Korean companies. The U.S., which has reduced its corporate tax rate to 21%, has been seeing a positive effect in its corporate revenue in the first quarter. According to foreign news reports, the net profit of U.S. conglomerates in the first quarter is estimated to undergo an increase of up to 18% compared to a year ago. With this increased income, companies can expand investment in new technologies, leading to an undeniable advantage in boosting their competitiveness. In contrast to the U.S., the Korean government’s move cannot avoid the criticism that the raise will hinder companies to securely obtain the costs necessary for research and development. According to a research study conducted by KERI (Korea Economic Research Institute), Korea is expected to experience an annual decrease in the investment sector by 4.9%. Considering that not only the U.S. but also many other countries including China and Japan, are aggressively preparing for high-tech industries, the raise will lead to fatal results.
Secondly, whether the increase in corporate tax rate will lead to job creation as planned is not certain. What’s more, it is even possible that it will rather stifle employment. The current administration led by President Moon is taking a larger role for government in job increases. In this regard, it can be said that the increase is aimed at securing public funds for creating jobs. Not only that, the government is putting pressure on corporations to increase not only investment but also jobs. As for Korea’s corporations, the government’s demand seems far-fetched, asking for more jobs while adding a great burden of corporate tax. According to an interview with one of the officials from a conglomerate, very few executives would be willing to hire more workers in this current situation. One of the conditions under which companies can increase employment is a stable profit and a higher corporate tax rate does not help at all. Furthermore, in a recent report by KIPF (Korea Institute of Public Finance), it is estimated that a one percentage point of corporate tax increase could reduce jobs by up to 0.5%.
Lastly, raising the corporate tax rate does not guarantee an increase in its tax revenue. In fact, Portugal, France and Hungary (three of the six OECD members which increased corporate tax rate) saw tax revenues drop by 5.4%, 8.8% and 13.7%, respectively in the last decade. As a result, these countries have either already cut or tried to cut their corporate tax rate since 2014. Then, what is the reason behind the opposite result? The point is that raising the corporate tax rate does not mean companies will bear the whole burden. Corporations tend to share the burden with workers by cutting wages or reducing jobs. In addition, it can also lead to burdening consumers by increasing prices. Such concerns are likely to take shape. When looking at the data from KCCI (Korea Chamber of Commerce and Industry), the estimate shows that the current corporate tax rate increase will result in consumers sharing 17% of the burden and employees 8.5%.
The government’s decision that even counters the prevailing global trend of cutting corporate tax should be backed by a solid cause and positive gains that outweigh the expected adverse effects. However, given the current situation of Korean companies and various predictions based on statistics, it seems less convincing to agree to the increase. Given the importance of investment in high-tech industries in the Fourth Industrial Revolution, critics show great concern over Korean companies’ competitiveness and long-term growth. In addition, it should not be overlooked that consumers and workers will also come to share the burden. If the increase conflicts with what the government is aiming for, it is necessary to seriously reconsider the matter.
It is still a matter of controversy whether the Korean government’s decision to raise the corporate tax rate was the right move. The increase can be viewed as an appropriate measure to ensure fairness in taxation within Korea’s specialized system. On the other hand, it can be criticized as a less convincing measure to take, reversing an international trend and holding the potential risk of stifling investment and employment. It would be early to jump to conclusion over the matter since its effect can be estimated mostly through analysis of prior examples of corporate tax implementation and looking through references based on predictions. However, as corporate tax is clearly a sensitive issue to be dealt with and also one of government’s major tax related policies, the effect it will bring should be examined more carefully over time.
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