Tax cut initiative to reveal MB’s true colors

By Cho Jin-seo

The government’s plan to lower the personal and corporate income tax is stalling, with even ruling-party politicians questioning its fiscal and social implications.

The debate inside Cheong Wae Dae and the Grand National Party (GNP) shows an identity crisis is going on with President Lee Myung-bak, whose slogan has been gradually changed from “business-friendly” in his early days of service toward “citizen-friendly” in more recent times.

The original plan is to cut the tax rate by 2 percentage points to 33 percent for personal income over 88 million won ($78,000), and to lower the corporate income tax rate by the same amount to 20 percent.

But influential GNP leaders, including Park Geun-hye, the forerunner for the 2013 next presidential election, began to disagree in public that the global and domestic economic situation won’t allow such benefits for the rich.

On Tuesday, GNP officials said that they will take time to further discuss the issue, as the cuts were not planned to start until 2013 anyway.

The GNP, viewed as a more right-wing and pro-business party than its rival Democratic Party, long supported the tax cuts. But Park and party chairman Ahn Sang-soo have recently proposed to either defer or revise the plan.

Park, the daughter of former President Park Chung-hee, wants to leave the maximum income tax rate as it is at 35 percent. By doing this, the government collects an additional tax income of 800 billion won ($710 million).

Ahn’s idea is to set up an additional bracket for people who earn more than 100 or 120 million a year and tax them 35 percent as it is now, while present a 2-percent cut for those who earn just less than that. Park and Ahn both agree on corporate tax cuts, though.

Left-wing parties are furious on both the income and corporate tax cut plans. They argue that the income gap has been widening rapidly ever since Lee came to the power in 2008, and the expanding government debt won’t allow loose tax policies in the future.

The critics of the cuts point out the slow economic growth since the financial crisis. In the 2007 election campaign, President Lee had said that Korea would achieve a 7 percent annual growth over his five-year term. Now the consensus is that it would be great to grow by 4 percent on average, and many economists doubt the benefit of tax cuts for growth.

Both the presidential office and the finance ministry are reluctant to follow this advice. Yoon Jeung-hyun, minister of Strategy and Finance, said in a meeting with lawmakers on Monday that the ministry has not changed its position. “I hope the National Assembly can make decisions on this issue next year after careful consideration,” he said.

President Lee and his aides at Cheong Wae Dae have called for tax cuts, as they see it as essential to make Korea a more favorable place for foreign investors.

The proponents often argue that Korea is losing its battle against Hong Kong and Singapore to become a regional financial hub because of its uncompetitive tax regime ― Hong Kong’s maximum income tax rate is 17 percent, less than half that of Korea. Both also have lower corporate tax rates.

But others point out that it is meaningless to compare Korea with city nations. When compared to sizable OECD nations, the tax burden is relatively lower in Korea compared to that in Japan or in Europe.

“Our tax burden rate is excessively low compared to the OECD average,” Lee Yong-sup, the Democratic Party’s secretary, said in a press release on Monday. “Under these circumstances, lowering the maximum income and corporate tax rate is a tax handout that will bankrupt the national coffers.”

Turning left?

Polls find that citizens now think President Lee is less conservative, or business-friendly, than before. In a recent survey of 60 professors of economics by the Center for Free Enterprise, a conservative lobby reveals such sentiment. In 2008, 85 percent of the respondents said the Lee administration is pro-free-market capitalism. Now only a half of them think so, while the other half believes Lee is populist or neutral.

Baek Yong-ho, Lee’s policy planning chief, refutes that Lee has shifted to the left. “The policy directive of our administration is to cut tax and abolish regulations. The lower the tax is, the better,” he said last week. The MB-nomics, he said referring to the initials of the President, is firmly rooted in free-market capitalism and the government needs to intervene only where the market fails.

The supporters of the low tax regime have a point. A recent World Bank report shows that Korea has the fourth largest shadow economy among 25 nations as percentage to national GDP. Only Italy, Greece and Mexico are ahead of Korea in the rankings of tax evasion.

The report analyzes that people are more likely to avoid paying tax when the rate is high. “The share of direct taxation and the size of government are highly statistically significant (to the size of shadow economy),” the report says. Interestingly, the report also shows that rich Nordic countries also have relatively high proportion of non-taxed economy in the rankings, probably because they pay high taxes.

Baek and others at the presidential office believe that the government can compensate the lost tax revenue from the cuts by exposing part of the shadow economy to the tax regime. He estimates this will add 20 trillion won in new revenue.

The one remaining question is whether this is achievable in the short term. Baek himself was not able to make dramatic changes in reducing the underground economy, when he was the commissioner of the National Tax Service until this July.