Since South Korea’s top 100 companies saw a sharp drop in profits in the third quarter, the so-called “peak-out” has become an obvious trend where corporate performance reaches its peak and enters into a downward trend. As some businesses have recorded higher sales but received a worse report card due to higher costs for raw materials and labor, they are rushing to turn an emergency mode on. If large companies, discouraged by poor performance, shrink investment, the South Korean economy will inevitably suffer a more devastating shock next year.
According to the Korea Enterprises Federation, as of the third quarter of this year, the top 100 Korean businesses saw a decrease of 24.7 percent in operating profits compared to a year ago. Even with a rise of 18 percent in sales, the scale of profits was cut down significantly due to even more money spent on raw materials, interest payments, and labor. What’s worse, as the Korean Public Service and Transport workers' Union is continuing the longest strike, things will get worse in the fourth quarter when steelmakers, petrochemical businesses, and construction companies will start to see the consequences of the ongoing strike. As even some leading companies struggle to handle a growing pile of stock in their storage facilities, it is jokingly but seriously said that they try to use less paper for printers with their financial circumstances getting as bad as during the GFC.
South Korea cannot feel safe at the national level, although exports will record a new high for two consecutive years. As the increase of import costs has turned out to exceed that of exports, the country will highly likely experience an annual trade deficit for the first time in 14 years. If an economic recession in China, highly likely to happen as of now, is combined with a shrinking U.C. consumer market, the worst-case scenario in the South Korean economy can become a painful reality where it will grow less than one percent next year.
Under these circumstances, six major groups of economic leaders and businesses requested, as one of the solutions to this choking economic situation, that the government and politicians work to get back the maximum corporate tax rate from 25 percent, as decided by the previous administration, to the previous level of 22 percent. For example, with local taxes included, 27.5 percent is applied to Samsung Electronics. At the same time, Taiwan’s TSMC, Samsung’s main competitor in the semiconductor foundry sector, is only subject to as low as 20 percent even with the government’s generous tax benefits provided. Before 2017, the maximum corporate tax rate in South Korea and the United States was 22 percent and 39 percent, respectively. However, in 2018, whereas the U.S. government lowered it to 21 percent, South Korea went in the opposite direction, due to which their gap in after-tax corporate profit rates widened from 7.3 percent points (by which South Korea was lower than the other) in 2017 to as high as 14.5 percent points.
The global trends of austerity measures and enormous fiscal deficits make it hard for the South Korean government to reignite the economy by increasing liquidity in the market. However, it can help create a virtuous circle of lessening the corporate tax burden for not only SMEs but also the rest of the business world; and enabling them to invest more, workers to get better paid, and stakeholders to receive higher dividends. The higher corporate tax rate applied to South Korean businesses than their major competitors only holds them back in the battlefield of global business. With political calculations and interests put aside, both the ruling and the opposing parties should agree to swiftly get the bill on a lower corporate tax rate passed at the National Assembly.