Tension escalating over corporate tax rate

By Yoon Ja-young

While the ruling and opposition parties are clashing over a corporate tax hike, the finance minister made it clear that the government is against raising taxes on businesses.

“It is not appropriate timing to raise corporate tax,” Strategy and Finance Minister Yoo Il-ho said at a National Assembly audit, Thursday.

He said that the increasing gap between chaebol and SMEs should be resolved by a “fair trade act or changes in the corporate ecosystem instead of strengthening corporate tax on top businesses.”

The remark comes amid escalating tension between parties regarding the corporate tax hike.

The ruling Saenuri Party is strongly protesting requests by some opposition lawmakers that National Assembly Speaker Chung Sye-kyun introduce a corporate tax hike directly to the National Assembly for voting. Generally, each issue should be discussed at committees within the parliament first, but the speaker is allowed to bring it in directly for voting in some exceptional circumstances.

If the corporate tax hike is put to a vote, it is likely to pass as the opposition parties, which have the majority, support an increase. The main opposition Minjoo Party of Korea submitted bills which aim at pulling up the corporate tax rate to 25 percent from 22 percent for those whose value surpasses 50 billion won. Those between 20 billion and 50 billion won will continue to be subject to the 22 percent tax rate. The minor opposition People’s Party demands raising tax rate to 24 percent for those surpassing 20 billion won.

The country’s corporate tax rate was lowered down to 22 percent from 25 percent during the former President Lee Myung-bak administration, which hoped that the tax cut would help boost the economy through a trickle-down effect.

The government and the ruling party say that the corporate tax hike will drive businesses to head overseas as other countries are slashing corporate tax rates. They also point out that the scrap of tax exemptions and tax cuts was as effective as a corporate tax hike.

Those demanding the tax hike, however, say that the effective tax rate of conglomerates is still much lower compared with other developed economies due to diverse tax exemptions and tax cuts. Some complain that individuals are shouldering heavier taxes than before while businesses are getting favors. Rep. Kim Hyun-mi of the Minjoo Party of Korea said that the government’s income tax collection increased by 32.5 percent between 2012 and 2015 while its corporate tax income dropped by 2 percent. They also point out that the corporate tax cut didn’t lead to job creation or investment.

“Korea has been in ‘low burden, low welfare’ state, but welfare spending will inevitably increase due to the aging of society and economic polarization. It is time to discuss how to fund this,” said Prof. Kang Byung-goo of Inha University.

An official predicted that President Park Geun-hye may veto the tax hike even if it is approved at the National Assembly. “In that case, it will lead to a severe political confrontation,” he added.