A recently unveiled bill on tax code revision targeting only the rich is hasty and politically expedient.
The revenue increase from raising tax rates for the top 93,000 earners and 129 highest earning companies is estimated to be some 5.5 trillion won ($4.88 billion) a year, or 24 trillion won over five years. This is far short of the 178 trillion won required to implement the 100 new policy projects of the Moon Jae-in administration during its five-year term.
Raising taxes on the rich alone goes against the principle of equitable taxation. In 2015, nearly half of income earners were exempted from taxes. Religious figures were exempted, too.
If a tax increase is needed, it would be fair for all to be burdened by higher taxes according to their ability to pay. However, President Moon has emphasized that taxes will not be raised for middle- and low-income groups or small and medium-sized enterprises. This arouses criticism that the tax increase targeting only the rich was populism.
There is also speculation that the ruling party made a politically safe choice ahead of local elections next year.
But what should come before raising tax rates is restructuring expenditure. Taxpayers would accept an increase in tax rates if their money is not wasted. However, it would be difficult to accept a policy to collect more taxes to subsidize the private-sector minimum wage and hire more civil servants in order to lower the jobless rate.
The process leading up to the bill is also regrettable. About two weeks ago, the government vowed to implement 100 projects without raising taxes. A day later, Choo Mi-ae, chairwoman of the ruling Democratic Party of Korea, raised the issue of tax rate hikes for the rich and proposed an increase in tax rates. The presidential office seconded that, and the government worked out the bill in a hurry. Her proposal has been reflected in the bill as it is.
The promise not to raise taxes was broken easily. Efforts to sound out the public are nowhere to be found either. Communication was also lacking, even within the ruling party where discontent is reportedly being voiced by lawmakers of the party who were alienated from its decision-making.
Given the circumstances, it is no wonder there is criticism that the move to raise taxes on the rich was sought politically and unilaterally.
One problem is that higher taxes on the country’s largest companies may hurt the national economy.
It also runs counter to the global corporate taxation trend, which shows that few advanced economies are willing to raise corporate tax.
If the tax rate is raised from 22 percent to 25 percent for companies with taxable income exceeding 200 billion won, under the bill, the corporate tax rate in Korea will surpass that of Japan, where it is 23.4 percent.
Korean companies’ international competitiveness might also fall. Corporate taxes, though paid by companies, are eventually shared by other market players. Companies cannot but shift part of their tax burden to suppliers, clients, employees, consumers and shareholders. Therefore corporate taxes essentially become taxes on all.
Furthermore, the effectiveness of higher corporate taxes in income redistribution is questionable.
In the big picture, a corporate tax raise may eventually reduce tax revenue.
Higher taxes will increase costs, weaken price competitiveness and diminish sales and earnings. A corporate tax hike will also lead to companies avoiding domestic investment and shrinking businesses at home, which reduces employment.
Meanwhile, opposition parties are questioning the corporate tax raise and opposing taxation populism.
Increasing tax rates for the rich alone is politically disputable and not so effective in financing fiscal expansion.
Now is the time for the National Assembly to fix the issues of raising taxes on only top earning individuals and companies.
A detailed plan to fund each of the 100 policy projects should be presented to the parliament for review.
Instead of raising taxes on a small portion of the population, a more effective way of increasing tax revenue would be to increase the sources of taxation and spread taxation.
Most of all, the Moon administration should try its best to maintain fiscal soundness, lest the burden on future generations be increased.