Should Korea increase corporate taxes?

Economy and Finance Minister nominee Koo Yun-cheol speaks during his confirmation hearing at the National Assembly in Seoul, Thursday. Yonhap

The debate over a corporate tax hike is reigniting, as Economy and Finance Minister nominee Koo Yun-cheol and the ruling Democratic Party of Korea are signaling support for placing a heavier tax burden on businesses, officials said Friday.

At his confirmation hearing Thursday, Koo acknowledged concerns from ruling party lawmakers over the sharp decline in corporate tax revenue in recent years. He said he would "actively and comprehensively review" restoring the top corporate tax rate to 25 percent, reversing the cut made by the Yoon Suk Yeol administration in 2022 from 25 percent to 24 percent.

"I will weigh considerations such as taxpayers' ability to pay and the broader economic impact," Koo said.

He openly criticized the previous tax-cut policy, noting that corporate tax revenue had plunged by 40 percent from about 100 trillion won ($72 billion) in 2022 to little more than 60 trillion won last year.

"The tax cuts were intended to spark a virtuous cycle of increased corporate investment, but instead, we are seeing a downturn in growth, consumption and investment," he said.

The country's corporate tax revenue has seen a sharp decline, dropping from 103.57 trillion won in 2022 to 80.42 trillion won in 2023, and down further to 62.5 trillion won in 2024.

The decrease is attributed to both the Yoon administration's 2022 decision to lower the top corporate tax rate and the economic slowdown, which negatively impacted corporate profits.

The DPK has also made clear its support for a corporate tax hike.

A senior party official said, "The revenue shortfall is becoming critical. With the government set to unveil its tax reform proposal for next year, the corporate tax issue should be reviewed swiftly and included as part of the budget-related legislation in the upcoming regular National Assembly session."

The comments indicate that the Lee Jae Myung government is expected to propose a corporate tax increase in its annual tax reform bill, set to be announced later this month.

The liberal party has criticized the corporate tax cut as a tax break favoring large corporations and the wealthy.

Its push for a tax hike is also driven by concerns over ongoing fiscal deficits for three consecutive years, which have strained government finances and could jeopardize the new government's key projects, such as the artificial intelligence transformation initiative.

However, concerns persist regarding the potential weakening of corporate competitiveness that could result from a corporate tax increase.

Kim Dae-jong, a professor at Sejong University's School of Business, noted that Korea's current top corporate tax rate of 24 percent is 2.5 percentage points higher than the OECD average of 21.5 percent.

"The high corporate tax rate could be a barrier to entrepreneurship. Korea needs to ease restrictions, particularly in industries related to the Fourth Industrial Revolution. Without an improved business environment, neither startup growth nor job creation is likely to occur," Kim said.

In addition, the Korea Economic Research Institute warns that, although raising the corporate tax rate might provide a short-term increase in tax revenue, it could lead to adverse outcomes like reduced corporate investment and job losses.

The institute estimated that a 1 percentage point increase in the corporate tax rate could result in a 3.97 percent long-term decline in facility investment and a 0.56 percentage point increase in the unemployment rate.