By Park Hyong-ki
The political parties’ last-minute agreement on a corporate tax hike for conglomerates is stirring up a debate in the private sector.
Liberal and conservative lawmakers agreed to revise the tax code to raise corporate taxes on companies with annual earnings of more than 300 billion won from 22 percent to 25 percent.
This is the first hike in nine years. The rate will be raised to the level it was before former President Lee Myung-bak’s business-friendly policy was implemented.
The rise has been part of liberal President Moon Jae-in’s pledge for correcting the broken down system of wealth redistribution and social safety nets.
Conglomerates represented by a local lobby group immediately expressed its discontent with this planned tax increase on wealthy companies.
About 70 conglomerates including Samsung Electronics will have to pay more taxes to the government beginning next year, which in turn will use the money to further finance social spending.
The Federation of Korean Industries (FKI) said the tax hike is clearly going against the global trend in tax cuts.
It added the move will not only “decrease Korean companies’ global competitiveness,” but also “hinder investment and thus job creation.”
The United States has recently passed a tax reform bill that will slash its federal tax rate from 35 percent to 20 percent. The world’s No. 1 economy calls it the “Trump tax cuts.”
France is also moving to cut its corporate tax rate from 33.3 percent to 25 percent in phases over the next five years.
Meanwhile, Korea’s tax hike will burden the local conglomerates to pay an additional 2 trillion won in taxes starting in 2018.
The FKI said the administration should reconsider it for the sake of its companies’ competitiveness.
But the government has been adamant about the tax hike from day one, reasoning that trickle-down economics did not work despite favorable tax cuts.
Youth unemployment is at a record high, while the wage growth on average has been below the increase rate of consumer prices.
Furthermore, the government said the agreement on the level of the corporate tax hike reached by politicians is weaker than it initially sought.
The Moon administration wanted to apply the hike on companies with taxable incomes of more than 200 billion won a year.
If it pushed for this original proposal, about 130 companies would face the hike.
Some conservative lawmakers are also not satisfied with the results of the all-night negotiations.
Analysts say the outright tax comparison between the U.S. and Korea may seem that Asia’s fourth-largest economy will be imposing higher corporate taxes.
But the tax rate includes a 10 percent regional tax here. In addition to the federal tax, the U.S. companies need to pay state and local taxes separately, depending on where they are based.
“The top 10 U.S. companies face higher effective tax rates than the top 10 Korean conglomerates,” said Choi Gi-ho, a professor at the University of Seoul.
With high inequality and the elderly poverty rate, global institutions such as the International Monetary Fund and the Organization for Economic Cooperation and Development have been suggesting that Korea improve its finances to better take care of its middle- and low-income earners.