Reviewing a Raise of the Corporation Tax

The political circle is considering raising again the corporation tax which was reduced by two percentage points starting from this year.

Controversies are expected over the wisdom of raising the tax again less than a year since being dropped.

Uri Party Representative Lee Sang-min, vice chairman of a policy coordination committee, said, “We are considering slightly raising the corporation tax to secure tax revenue,” adding, “There are many representatives who share the same idea.”

He also said, “We cannot reduce the budget for national defense or education, and it is hard to shrink the welfare budget in this aging society,” adding, “Raising the corporation tax is a fundamental measure to resolve the lack of tax revenue.”

Representative Kim Jong-yull of the Uri Party also said, “I proposed revamping the corporation tax rate system in a dinner with President Roh and Uri Party representatives on the Finance and Economy Committee of the National Assembly, which was held on September 26 in Cheong Wa Dae.”

The Ministry of Finance and Economy says that it has never officially considered raising the tax rate. But there is an atmosphere around that the tax rate should increase by about one percentage point.

The primary reason for discussion over the corporation tax rate is insufficient tax revenue. The logic is that an increase in the corporation tax of which tax revolt is relatively minor is a solution to insufficient tax revenue since raising the liquor tax and the LNG tax is effectively impossible.

The current corporation tax rate is 13 percent on the net income of 100 million or less and 25 percent on more than 100 million won.

A one percentage point raise of the tax leads to 2.5 trillion won more tax revenue.

The fact that corporate investment has not grown this year even with the reduced corporate tax is another background issue of the talk of raising the tax rate.

With the top 0.5 percent companies paying 70 percent of the corporation tax, investment does not increase although mostly large companies are enjoying the benefit of tax rate reduction.

Kim Kwang-doo, professor of economics at Sogang University, said, “It is unreasonable to raise the tax rate when the economy is in bad shape in order to increase tax revenue,” adding, “As an interest rate hike is expected, a tax increase will cause corporations to suffer from a double burden.” He also said, “The government should be responsible enough to think over if there is a reduction of annual expenditures.”

Ki-Jeong Ko In-Jik Cho koh@donga.com cij1999@donga.com