Unification Tax

President Lee Myung-bak said in his Liberation Day speech Sunday, “Unification will come without fail. I think it’s about time we prepare practical measures, including a unification tax, in preparation for the day.” He urged all of Korean society to discuss the issue. He announced a plan to unify the Korean Peninsula in phases by first building a peace community, followed by a community of economy and finally a community of the Korean people under the condition of a nuclear-free peninsula. This sounds reasonable but the introduction of a unification tax will face strong resistance unless a broad consensus is reached.

In his proposal, President Lee did not mean immediate implementation of a unification tax but urged a start to discussion of the matter. Germany has spent 2 trillion euros (2.57 billion U.S. dollars) over the past 20 years since reunification. Given this reality, Korea also needs to prepare itself for the astronomical cost required for reunification. In light of the economic power and the portions of populations, the situation facing the two Koreas is far worse than that of East and West Germany. If the two Koreas reunify without preparation, the South Korean economy, ranking 15th in the world, might not weather the shock and both economies could collapse in tandem. If reunification is inevitable and if the Koreas have no choice but to pay the cost, it will be wise for South Korea to prepare in advance.

Even so, a unification tax requires a careful approach since it will add to the burden of the public and companies. Generally, introducing a new tax entails stronger resistance than raising an existing tax. A special purpose tax could give the impression that the government unilaterally seeks to transfer the burden onto the people. With inter-Korean relations at an extremely low point, Seoul should also think of whether now is the time to start discussing a unification tax. Instead, the government must significantly improve its fiscal soundness in preparation for reunification, and build up and wisely use the inter-Korean cooperation fund. Another idea is to reinforce taxation on the underground economy and gradually raise excise, income and corporate taxes.

The “fair society” President Lee has proposed as a core value of his administration in the latter half of his term cannot be attained without the government handling matters fairly and taking the lead itself. If the government seeks to sternly enforce laws and regulations and repeatedly stress the rule of law while issuing pardons to politicians and entrepreneurs implicated in corruption scandals and crimes, who would consider this fair and just? The envisaged co-prosperity of conglomerates and smaller companies should also not be directed toward hampering normal corporate activities and regular operation of the market economy through attacks on conglomerates. Policy in support of the people is necessary but reckless pursuit of a “populist ideology” should be avoided as well.

The same holds true for the purported advancement of politics, which President Lee has repeatedly urged. Reform of the election system and administrative districts is necessary to dispel politics of extreme confrontation and anachronistic regionalism, and to assure the economic development of the provinces and improvement of administrative efficiency. A constitutional amendment also needs to be considered in tune with the fast-changing environment. When it comes to a constitutional amendment, however, consensus can hardly be reached even within the ruling Grand National Party, let alone with opposition parties. Everything lies with how to run and manage rather than institutions per se. If the government and the ruling party want change in politics and administration, they should demonstrate sacrifice first.