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Controversy continues over ministry's 'anti-capitalism' policies
Deputy Prime Minister and Finance Minister Hong Nam-ki speaks during the parliamentary audit of the ministry at the National Assembly in Yeouido, Seoul, Thursday. Yonhap
By Lee Kyung-min
By Lee Kyung-min
The government policies of imposing a heavier tax on corporate income and financial investment continues to draw backlash from businesses and experts who claim excessive government intervention will dampen business sentiment, with the country's growth opportunity lost in the process.
Corporate and investment activities should not and cannot be dictated by politically charged measures to disincentivize profit-seeking, a right that should be guaranteed in a free market economy, they say.
Drastic reassessment of policy priorities is needed to reduce and remove unnecessary spending amid expansionary fiscal policy ― defined by ineffective and repetitive welfare programs ― prolonged and strengthened by the COVID-19 pandemic. Otherwise, the government efforts to identify new sources of revenue will backfire, derailing the administration's key policy directives.
Deputy Prime Minister and Finance Minister Hong Nam-ki said Thursday that corporate net income spent for hiring, repayment of debt and research and development (R&D) among other investments will be recognized as deductibles, exempt for the next three years from corporate tax revised to impose a heavier amount on corporate profit retained in the form of reserves.
The revision announced in July seeks to impose tax on what the government considers “excessive income,” defined as the amount of corporate profit reserved that is greater than 50 percent of its net income or an amount greater than 10 percent of the owner's capital in the firm.
Subject to the revision are some 250,000 businesses, 80 percent of whose shares are held by firm owners, their families or individuals whose financial interests are closely tied to owners. They account for a third of businesses in Korea including small- and medium-sized enterprises.
“The revision will be used to punish only tax dodgers,” Hong said during the government audit of the ministry at the National Assembly. “The government will outline relevant ordinances to have law-abiding corporate activities of tax-paying firms unaffected.”
Yet clearly limiting the number of activities recognized as deductible itself is a choice forced, according to Korea Economic Research Institute (KERI) economic policy team head Hong Sung-il.
Businesses make investments after a thorough review of long-term prospect of corporate growth and profit not to mention possible risks entailed by a variety of uncertainties such as the pandemic or labor issues among many other unforeseeable factors. This is why deductibles offered for hiring in his view essentially means the firm is forced to take risks concerning labor costs, the largest part of the spending with the least guarantee over control.
“The government works best when it stays out of corporate decisions, especially when it involves labor unions. The push seeking new revenue is certain to become bolder following immense fiscal spending with a notable drop in corporate tax income,” he said.
Another policy unsettling the local financial investment sector is lowering the minimum combined value of shares held by individual retail investors subject to capital gains tax to 300 million won ($260,000) from the current 1 billion won.
The ministry maintains that the strengthened requirement is needed and does not necessitate another round of reviews given the issue was finalized two years ago, saying reverting to the original plan or modifying the finalized plan in any way would undermine policy consistency.
But lawmakers from both the ruling and opposition parties say the plan must be revisited because investor sentiment would be deterred, sapping the vibrancy of the equity market that falls far behind compared to in other advanced economies.
Further advancing the concern is retail investors having sold their shares for the sixth consecutive day, a worrisome trend whereby local investment funds are increasingly flowing overseas.
Retail investors net sold 165.2 billion won, Thursday, continuing the selloff that began on Sept. 28, the longest continuation since February when the local market tanked at the beginning of the pandemic.
The amount net sold was a combined 1.48 trillion won in the eight-day period, far surpassing 875.3 billion won net bought by foreigners and 512.5 billion won by institutional investors.
Korea Securities Depository data showed foreign securities traded by local investors was over $24.4 billion (28.2 trillion won) in September. Of the total, 94 percent was American securities.
Bank of Korea data showed the amount of foreign securities traded by local investors stood at $2.57 billion in August, continuing the increase for the 54th consecutive month.