[Tax Cut] Tax Cuts Eyed to Fuel Economic Growth

By Lee Hyo-sik
Staff Reporter

The Lee Myung-bak administration will likely choose tax cuts as a primary tool to achieve higher economic growth and strengthen the country's long-term potential.

Through a range of tax cuts, it is aiming to encourage businesses to expand investment and create jobs, while prompting consumers to spend more to boost domestic consumption, as exports, Korea's main engine of growth, are projected to slow in the coming months on high oil prices, a looming U.S. economic recession and other external negatives.

President-elect Lee Myung-bak's presidential transition team has said it will cut maximum corporate taxes from 25 percent to 20 percent by one percentage point per year over the next five years. Currently, companies earning over 100 million won in taxable income are subject to up to 25 percent of corporate income tax.

The transition committee also plans to allow companies to deduct up to 10 percent of their investment in research and development activities from taxable income, up from the current 7 percent.

Rep. Choi Kyung-hwan, a key member of the transition committee, said the corporate tax cut is key to attracting foreign investors and companies, as well as to creating a more business-friendly environment.

``The corporate income tax reduction is not a matter of choice, but a matter of life and death for Korea in an increasingly globalized business environment,'' he said.

Choi said most major economies around the world are engaged in fierce competition to cut corporate taxes as a way of attracting business from outside.

``Hong Kong and Singapore, which impose significantly lower corporate taxes than Korea, have further slashed taxes recently to draw more foreign investors. Also, France currently levies 34.4 percent corporate income tax but plans to reduce the tax to as low as 20 percent. Unless Korea cuts corporate taxes, we will not be able to win over multinational firms,'' he stressed.

According to the Ministry of Finance and Economy, Korea imposes heavier taxes on corporations, compared to other advanced economies, making it less attractive to businesses.

The country's corporate income taxes accounted for 3.5 percent of its gross domestic product (GDP) in 2004 ― an increase from 3.3 percent in 2000, higher than the OECD average of 3.4 percent, which dropped from 3.7 percent.

Other countries have lessened corporate tax to attract more foreign investors and companies. But South Korea has placed a heavier tax burden on businesses over the past few years, making it a less business-friendly environment.

But many have expressed concerns that tax cuts decrease state tax revenues, arguing that the government needs to secure more resources in the future to fund a number of social welfare-related programs to support the increasing elderly population.

In response, Choi said that tax revenue will shrink by 7 trillion won if the corporate tax rate is slashed by 5 percentage points, but said its impact on state coffers will not be as severe as the envisioned tax cut.

``Some worry that the tax cut will adversely affect government spending on social welfare-related programs. But it will give more money back to businesses and individuals, which will boost private consumption, business activity and job creation,'' the lawmaker said.

Also, Kang Man-soo, the nominee for the incoming administration's first planning and finance minister, is a strong advocate of tax reduction, even suggesting that the country should abolish corporate income tax to boost the economy and attract foreign investors and companies.

He has been a key economic affairs advisor for President-elect Lee for years and is currently serving as head of the economic affairs subcommittee on Lee's transition committee.

He is an architect of former Seoul mayor's much-championed ``747 Vision,'' which promises to achieve a 7-percent gross domestic product (GDP) growth per annum for 10 years, a per capita income of $40,000 by 2017 and make Korea the seventh largest industrialized country under his leadership during the next five years.

The presidential transition committee has also said the next government will reduce taxes on gasoline and other oil products by 10 percent in line with Lee's pledge aimed at easing the financial burden on businesses and households in the wake of surging international oil prices.

Political parties have agreed to cut taxes on oil products as well as capital gains tax rates on homeowners who own one house during the extraordinary National Assembly session this month.

The incoming administration also plans to reduce taxes on real estate transactions in the second half of the year. The transition team has said the next government will reduce the real estate transaction tax rate from 2 percent to 1 percent to revitalize the stagnant property market.

Additionally, expressway tolls will likely be discounted by up to 50 percent during commuting hours from March at the earliest. The designated discount hours will be from 5 to 7 a.m. and from 8 to 10 p.m.

Rep. Choi said people commuting during these hours will get a 50 percent discount, adding the discount plan is intended to lessen the living expenses of the general public.

The two hour timeframes are the least busy hours during commuting hours and the transition team explained that offering discounts during these hours would help ease traffic congestion.

leehs@koreatimes.co.kr