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[Editorial] Taxing cash reserves

Business groups pressured to make investments

Few would dispute the ruling Saenuri Party is pro-business. The conservative party and its administrations have cut corporate taxes, controlled sharp wage inflation and revised laws when deemed cumbersome to business activities.

The party and its administrations have provided the business community with all these favors in the name of the nation’s economic advancement. The relationship has been mutually beneficial, with the business community remaining a staunch supporter of the party, even outside of election years. After all, corporations have provided the party with huge contributions, in violation of the election-funding law.

But the symbiotic relations are now undeniably strained, with the Saenuri administration under President Park Geun-hye threatening to tax what it calls “excess cash reserves” of large business groups, most of them family-controlled conglomerates.

The Park administration is doing so to put pressure on chaebol to stop hoarding cash and to use it to make investments, pay dividends and raise wages. In other words, the administration would like to see a large share of corporate earnings flowing to households, with more people put on their payrolls and their pockets fattened. As the administration believes, the weak economy will not make a turnaround anytime soon unless consumers start to loosen their purse strings.

But the responses from the business community are not encouraging, with the Federation of Korean Industries, the special interest for chaebol, refusing to make any concrete commitments to scaling down their bulging cash reserves. In reply to the new deputy minister for economic affairs’ call for investment and job creation, the FKI made a bland statement that it would cooperate with the administration on its economic policy.

The FKI says that taxing cash reserves, much of them being retained earnings, would mean double taxation, with the earnings being after-tax profits. It says that companies, in recovering from international financial crises, have put aside some earnings for rainy days and that they are not excessive by any means. Few would say that the claim is unreasonable.

Nonetheless, the proposal to levy a tax on excess cash reserves is gaining momentum, as investments remain at historical lows while corporations are making record profits. Some go so far as to demand a “punitive tax” be levied on retained earnings to spur investments.

Advocates justify the proposed tax, saying it is time for chaebol to return the favors they have received from the conservative ruling party and its administrations. According to one estimate, the business community has gained 28 trillion won from the latest cut in the corporation tax ― a measure taken to encourage investments.

Yet investments have remained in the doldrums in recent years, even declining last year by as much as 3 percent to 123 trillion won.

Chaebol will have to help the administration engineer a turnaround by increasing investments, whether or not excess cash reserves will be taxed. It will be for their own good. They can hardly hope to have a strong overall income unless the local economy is sound.