Corporate tax cuts

Japanese Prime Minister Naoto Kan has decided to lower Japan`s corporate tax from 40 percent to 35 percent from next year. A former leader of the Democratic Party of Japan, Kan said his decision seeks to prevent foreign companies from going elsewhere and to preserve jobs. The main opposition Liberal Democratic Party agrees with the cut, while the minority Japan Communist Party and Social Democratic Party see it as inevitable despite a few differences.

Japan`s fiscal deficit is the worst among leading industrial nations. Some even say the consumption tax (equal to the value-added tax in Korea) should be raised to enhance fiscal soundness. Despite opposition from the Finance Ministry, the Democratic Party-led Japanese government decided on the tax cut to revive the economy and strengthen the global competitiveness of Japanese companies. Taiwan, Singapore and the European Union have all recently cut corporate taxes.

In Korea, the maximum corporate tax rate is 24.2 percent, including the local income tax, a figure lower than those of Japan, the U.S. and Europe but higher than those of Chile, the Czech Republic, Singapore and Poland. Ajou University economics professor Hyun Jin-kwon said, “In advanced countries, the corporate tax accurately reflects the actual corporate burden, but in Korea, a quasi tax should also be included for the measurement. If the quasi tax is included, Korean companies have the highest overall tax burden in the world.” Korean companies paid 32 trillion won (27.7 billion U.S. dollars) in quasi tax last year, including various levies, non-voluntary contributions, social insurance fees and employer taxes. Last year’s corporate taxes amounted to 35 trillion won (30.3 billion dollars).

The Lee Myung-bak administration had planned to cut the maximum corporate tax 2 percentage points from this year. This plan, however, was postponed two years in the face of protests by opposition parties including the main opposition Democratic Party and the progressive Democratic Labor Party, which called the proposal “tax cuts for the rich or conglomerates.” Despite fiscal strain, countries are lowering corporate taxes not to give preferential treatment to companies but to increase investment, jobs and income and raise national competitiveness. In the Democratic Party, Rep. Kim Jin-pyo and Lee Yong-sup served as tax directors at the Strategy and Finance Ministry, and Rep. Kang Bong-kyun and Jang Byung-wan were economic ministers, meaning they are well aware of Korea’s severe situation. It is disappointing that they remain silent on the false claims on corporate tax by their party.

Editorial Writer Kwon Sun-hwal (shkwon@donga.com)