Go to contents

Tax Reduction Is More Proper Than Expansion of National Expenditure

Tax Reduction Is More Proper Than Expansion of National Expenditure

Posted June. 03, 2005 06:51,   


The National Economic Advisory Council (NEAC), presidential advisory committee on economy, warned, “To facilitate economic recovery, the government should expand deregulation and tax reduction, and curtail its expenditure.”

The council also added that “proper” application of the exchange rate is indispensable to the enhancement of the nation’s competitive power for an export market and that the measure limiting the voting power of majority shareholders should be abolished because it may cause disputes regarding its constitutionality.

This announcement is especially significant because it comes at a point when the government is considering the reduction of real estate tax and drawing up a supplementary budget for the promotion of economic recovery. Now, Attention is focusing on how much the NEAC’s advice will be reflected in the real implementation of the government’s economic policies.

In fact, the NEAC has exerted a great influence on the government’s economic policy decisions, as seen in the May 4 Measures for Real Estate, in which the council suggested the reflection of real transaction prices in levying real estate transfer tax.

The council called for tax reduction and deregulation, rather than the expansion of government expenditure. According to the Ministry of Finance and Economy, the NEAC requested advice from experts in the private sector, such as professors, the chairman of the Korea Chamber of Commerce & Industry, and presidents of national research institutes like the Korea Development Institute, and submitted a written recommendation based on their advice to Cheong Wa Dae and the Ministry of Finance and Economy on May 7.

In regard to financial policies, the council stressed, “Given the experience of advanced countries that suffered economic setbacks when their economy was booming, the government should shift its attention to forming micro economic policies that foster the voluntary involvement of economic actors, such as tax reduction, deregulation, and privatization.”

In response, the Bank of Korea (BOK) said, “Before Korea’s financial crisis, increasing one trillion won of the nation’s expenditure led to a 0.33 percent increase in the GDP of the following year. Now, however, such a measure is expected to lead to an increase of just 0.04 to 0.09 percent.”

This means that it is hard to expect a rapid economic recovery even if the government draws up a supplementary budget.

Regarding the measure of limiting the voting power of majority shareholders, the council also said, “The article in the Securities and Exchange Act that blocks majority shareholders from exerting their voting power beyond three percent when deciding to revise articles of incorporation relating to the introduction of the concentrated voting rights system should be removed because it may confront criticism over its legality due to its violation of property rights and the free market mechanism.”

In fact, when shareholders decide on whether or not to introduce the concentrated voting rights system, which was designed to protect the rights of minority shareholders, majority shareholders are prohibited from exerting more than a three-percent vote no matter how many shares they hold. Business leaders have been calling for the abolition of this article of the act, but the government has remained resistant.

The council also urged the government to abolish a regulation that puts an undue burden on companies that build a new factory on a site measuring more than 30,000 square meters.

Regarding the exchange rate policies, it stressed, “To foster exporting companies’ competitive power, proper application of the exchange rate is very important.” However, they did not mention specific standards for the exchange rate.

Chi-YoungShin higgledy@donga.com