[Editorial] Tax Cuts to Revive the Economy

The government yesterday announced massive cuts in income, corporate, real estate and other taxes worth 25 trillion won over the next five years. Through the biggest tax cut in Korean history, the government plans to cut taxes in most areas. Under the previous Roh Moo-hyun administration, Koreans were burdened by hefty taxes to prop up a bigger government. Given that, the new tax plan is a watershed in the bid to cut taxes instead of raise them.

The appropriate level of tax cuts encourages households and corporations to consume and invest more, thus speeding up economic growth and creating more jobs. The Bank of Korea said economic growth would have increased a percentage point last year had the government not collected taxes to the point of registering a budget surplus of 15.3 billion won, not to mention 7.7 trillion won more in private consumption and 3.9 trillion won in additional investment. If the government uses effective follow-up measures after implementing its tax cuts, it can replace the vicious circle of chilling investor confidence, falling household consumption, sluggish domestic demand and damaged growth potential with a virtuous circle.

When the U.S. economy went into recession in the early 1980s, then President Ronald Reagan aggressively pushed through "Reaganomics," mainly tax cuts for large corporations and deregulation, paving the way for economic recovery. If Seoul drastically cuts government spending, it can maximize the influence of its tax cut policy and lower the fiscal burden.

The government plans to announce late this month revisions to the comprehensive real estate tax, which puts a heavier burden on homeowners in the middle and higher income brackets. Its decision to lower the capital gains tax, exempt more people from the tax, and freeze the rate of assessed value on which the tax is imposed at 80 percent, reflects government efforts to ease the tax burden and boost real estate transactions.

The government also plans to lower corporate tax but will delay doing so by a year for large corporations whose net income exceeds 200 million won. This is to secure financial resources to help the poor. A government official said, “If the tax cuts include not only inheritance and gift taxes but also corporate tax, the government will be labeled by critics as ‘a government for the rich.’ That’s why we made our decision.” The government needs to convince the people that corporate tax cuts will result in corporate investment, which will, in turn, benefit not only the rich but also the entire population.