Corporate tax and economic growth
Back to business as usual. The election is over. The new members of the National Assembly were chosen. Sooner or later, one of the political hot potatoes will be back on the table, again — corporate tax. Korea’s top corporate tax rate is 22 percent.
The bone of contention is whether the current rate should be cut as promised or raised. The real question boils down to whether it makes the country a globally competitive place for investment.
The world’s average corporate rate was hovering at almost 50 percent in the early 1980s and is now at around 25 percent. This is a result of an aggressive tax rates competition that has been ongoing over the last three decades. The trend has been one of the key contributing factors behind world economic growth over the same period. It’s a fact not an argument.
To make the story simple, the truth is that investment is the key to sustainable economic growth. An investment decision is a long term one. We know the corporate tax rate has always been a key decision factor. Earnings mean “after-tax” profits at the end of the day.
That’s why companies care about the rate. That’s why our rate needs to remain and be kept competitive. Our economic future is at stake.
Who are our main competitors? It is obvious that we are not competing with the U.S., Canada, Japan or the U.K. We might do so in the far future but not in the foreseeable one.
We compete with Hong Kong, Singapore, Taiwan and potentially fast-growing Southeast Asian countries. It’s a fierce competition. In recent years, Hong Kong cut the rate to 16.5 percent and the rates in both Singapore and Taiwan were reduced to 17 percent. Korea is falling behind the competition. We need to do something about it, sooner than later. A sense of urgency and follow-up efforts are what we need now.
Above of all, a clear message should be sent about the goal and the competitors. The short-term goal is to make more investment, whether foreign or domestic, in Korea. The long-term fruit is a no brainer.
For that to happen, Korea should remain competitive enough to attract global players to the country. And we need to keep the corporate tax as competitive as at least those of our immediate competitors — Hong Kong, Singapore and Taiwan.
Twenty-two percent is at least 5 percentage points above. It’s not competitive.
We should not underestimate a prediction that Asia is already leading the global economy. That’s why Korea should be at least one step ahead of the curve.
The rules of the game should be made and kept transparent and predictable. What we hear quite often from multinational companies in Korea is that overall environment has improved but is still far from international standards.
They complain that public employees often go too far and tend to cross the line. It seems to them that Korea is not ethically competitive. This negative image about ethical standards should be improved quickly with real and serious efforts.
Global tax competitiveness is all about jobs and growth. It is not a symbolic or rhetoric issue. It’s a real thing. It’s a question of “lead or perish.”
The policy of today shapes where our economy will be tomorrow. When our policy is announced, it’s a promise to the global business community.
If our promises are made to be broken, they won’t be trusted. It’s important for lawmakers and the government to make sure that our economic future is not something that can be on the table for political bargaining. We should never forget that our jobs and growth are at stake.