‘Heavy Taxation Hindered GDP Growth Last Year’

The Bank of Korea said yesterday that economic growth would have grown one percentage point more and investment would have risen 3.9 trillion won had the government not collected taxes to the point of registering a surplus budget last year.

The report presented to ruling Grand National Party lawmaker Seo Byeong-soo by the central bank yesterday estimated economic growth would have risen from five to six percent had taxes not resulted in a surplus budget of 15.3 trillion won last year.

Given that national GDP reached 901.19 trillion won (970 billion dollars) last year, GDP would have grown eight trillion to nine trillion won. The central bank calculated the effects of the surplus budget on economic growth by considering inflation, the savings rate in the private sector, and import inducement.

Private consumption fell two percentage points and investment 1.8 percentage points since the government collected more taxes than needed.

In other words, private consumption decreased 7.7 trillion won and investment dropped 3.9 trillion won last year. The central bank said its analysis is based on the assumption that 34.5 percent (corporate tax rate) of the surplus budget was returned to corporations and the remainder to households.

“As income and corporate taxes increased last year, the government collected more tax than needed. If taxes go up, aggregate demand such as consumption and investment decrease over the short term, which in turn affects aggregate supply over the long term,” a bank official said.

Lawmaker Seo said, “If the government had imposed tax appropriately last year, Korea would not have suffered from sluggish domestic demand. This is why we need tax cuts. The government should return the surplus budget to taxpayers via a revised supplementary budget and tax rate adjustment.”

ditto@donga.com