Competitiveness of Korea's taxes

By Chang Se-moon

“Taxes are a crucial component of a country’s international competitiveness. In today’s globalized economy, the structure of a country’s tax code is an important factor for businesses when they decide where to invest, how much to invest, and which types of operations to locate in which countries. No longer can a country levy high taxes on business investment and activity without adversely affecting its economic performance.”

These are not my words, but direct quotations from the Introduction of the International Tax Competitiveness Index 2015 that was prepared by Kyle Pomerleau and Alan Cole, and released late in September by the reputable Tax Foundation.

The International Tax Competitiveness Index measures the business competitiveness of the 34 member countries of the OECD of which Korea is a member in terms of five categories such as corporate income taxes, individual income and payroll taxes, consumption taxes, property taxes, and the treatment of foreign earnings.

Where does Korea stand in global tax competitiveness? Note that a lower tax rate means a higher, i.e., better ranking. Korea ranks 15th in corporate income taxes, third in individual income and payroll taxes, 25th in consumption taxes, fifth in property taxes, and 31st in the treatment of foreign earnings, with the overall ranking being the 13th best.

Authors state that many countries have been working on improving their tax system to be more competitive, and cite New Zealand, which ranks second in the overall index, as an example. According to the study, “New Zealand cut its top marginal individual income tax rate from 38 percent to 33 percent, shifted to a greater reliance on goods and services tax, and cut its corporate tax rate to 28 percent from 30 percent.” Even before all these changes, New Zealand had no inheritance tax, no payroll taxes, and no general capital gains tax other than a tax on gains from foreign debt and equity investments.

I have never visited New Zealand, but heard many compliments about the country, which apparently is very beautiful with frequent earthquakes. The first sentence on its official website says: “Every day a different journey” There are 4.4 million New Zealanders, informally known as Kiwis, of whom 69 percent are of European descent, 14.6 percent are indigenous Maori, 9.2 percent Asian, and 6.9 percent non-Maori Pacific Islanders.

Estonia currently has the most competitive tax code among the 34 OECD countries. The country is surrounded by the Baltic Sea to the west with Sweden across the sea, Russia to the east, Latvia to the south, and Finland to the north across a Baltic Sea channel. Estonia is not an island, but has 2,222 islands and islets in the Baltic Sea. It is a small country with 1.3 million people, but belongs to the European Union, the eurozone, and the North Atlantic Treaty Organization. Estonia’s tax system is characterized by a 20 percent tax rate on corporate income that is only applied to distributed profits, a flat 20 percent tax on individual income that does not apply to personal dividend income, property tax that applies only to the value of land rather than taxing the value of real property or capital, and a territorial tax system that exempts 100 percent of the foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

France has the least competitive tax system by being ranked 34th out of 34 OECD countries. France has one of the highest corporate income tax rates in the OECD at 34.4 percent, high property taxes that include an annual net wealth tax, a financial transaction tax, and an estate tax. France also has high, progressive individual income taxes that apply to both dividend and capital gains income.”

The U.S. is ranked 32nd with the highest corporate income tax rate in the OECD at 39 percent, no territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation, and a relatively high individual income tax rate at 48.6 percent at the top that taxes both dividends and capital gains, albeit at a reduced rate.

By the way, please note that I am simply relaying the interesting study that leaders in Korea and beyond may want to know. I am not necessarily advocating lower or higher tax rates in Korea or any place else. This is because there is no free lunch and there is an equity issue on the other side of efficiency that lower tax rates may suggest. Lower tax rates are likely to imply lower tax revenues that in turn may lead to lower governmental services. There is no such thing as optimal tax rates that everyone can agree to. I remember driving on Interstate Highway in Montana at about 80 miles per hour. I noticed that everyone was passing me, apparently not worrying about being ticketed. You see, Montana levies one of the lower tax rates.

Chang Se-moon is the director of the Gulf Coast Center for Impact Studies.