Tax the rich, hurt the poor

In the 1970s, the U.K`s Labor Party imposed a progressive income tax of 83 percent on high income earners to finance a social security system for the poor. Many agreed with the tax at first but its results were miserable. Britain saw the exodus of the rich and companies to other countries with lower taxes. In an economic downturn, overall tax revenues declined and the social security system also regressed.

In Korea, the Roh Moo-hyun administration adopted the double whammy of the comprehensive real estate tax and the capital gains tax to collect more from the top 2 percent of income earners and spend the money on the remaining 98 percent. Contrary to expectations, however, the prices of housing, land and jeonse (lump sum loan to a landlord in return for home rental) soared starting in the affluent Gangnam district of Seoul and spread to other regions. As a result, the lower income and middle classes suffered from skyrocketing property prices. Real estate prices stopped rising not because of the “tax bomb” that incited class conflict but because of the increased supply of houses and decreased demand resulting from the low birth rate and rapidly aging populace.

Opposition parties are demanding more taxes on the rich to secure financial resources for their proposed free welfare package. Chung Dong-young, supreme council member of the main opposition Democratic Party, urged a “tax on the wealthy,” saying, “The financial resources for universal welfare should be secured from taxing the rich.” Fellow council member Chun Jung-bae suggested a French-style social welfare tax imposed on the upper class by adding extra taxes to existing income taxes. The New Progressive Party said, “We are thinking of dropping a tax bomb on the rich for universal welfare.”

The free welfare package will undoubtedly increase the tax burden significantly. The call for higher taxes on the wealthy might be more straightforward than those of Democratic Party Chairman Sohn Hak-kyu and floor leader Park Jie-won, who say they will not raise taxes but cut government spending to secure financial resources for welfare. The argument that more taxes should be collected from the rich for the poor, however, is as flawed as the argument for free welfare.

If income or corporate taxes are raised, high-income earners or companies will take action accordingly. If more taxes are imposed on those who own a home or a commercial building, the rent will rise and ensuingly hurt tenants or the self-employed. If corporate taxes are raised, workers` salaries and perks will be cut and lead to lower corporate investment, fewer jobs and stagnant incomes. Money and companies will move to countries with lower taxes than Korea. Once the Korean economy is trapped in this vicious loop, the biggest victim will be the lower income class.

In 2006, Johnny Hallyday, a rock singer dubbed the “Elvis Presley of France," moved to Switzerland, which does not tax the wealthy. He said, “I cannot live in France anymore because of too much tax,” adding, "I agree with paying taxes but I cannot agree with excessive taxes.” France, which is cited as a model by proponents of higher taxes on the rich, has seen as many as 100,000 of its nationals flee to Switzerland to avoid taxes as Hallyday did. On the contrary, Austria, Denmark and Finland have abolished taxes on the wealthy to block capital flight and stimulate domestic consumption. Increasing taxes on the rich is highly likely to have an adverse effect on the poor rather than benefit them.