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Higher corporate tax rates hit pocketbooks

Aug 02,2019
A study claimed on Thursday that higher corporate taxes have had a negative effect on workers’ incomes as companies cut back on investments.

According to the Korea Economic Research Institute (KERI), since the maximum corporate rate was raised from 24.2 percent to 27.5 percent, annual average incomes for Korean workers have shrunk from 750,000 ($631) to 840,000 won ($707).

The Moon Jae-in government raised the maximum corporate tax rate from 22 percent to 25 percent, which went into effect in 2018. All local governments levy an additional 10 percent on the corporate tax, which they call income tax. That brought the total maximum corporate tax rate to 27.5 percent.

KERI’s study found that when the top corporate tax rate was raised 3.3 percentage points, companies’ tax payments rose 3.65 percent.

As a result, the report said, companies last year were estimated to have cut back 20.9 trillion won in investment in Korea.

KERI also estimated that when the corporate tax rate is raised 1 percentage point, foreign investments in Korea shrinks 3.72 percent annually.

Since the tax hike, it said, foreign investment in Korea fell 3.6 trillion won.

Higher taxes also encourage investment outside of Korea. The study said with the corporate rate raised 3.3 percentage points, overseas investments grew 6.7 trillion won.

Combining the decrease in investment in Korea and the increase in investments abroad, Korea has missed 10.3 trillion won in investment opportunities, it concluded. That accounts for 49 percent of the 20.9 trillion won investment reduction last year, it said.

KERI said the 20.9 trillion won decline in local investment has reduced Korea’s GDP by 1.03 percent.

With higher corporate taxes, Korean companies with offices overseas are also avoiding repatriating earnings. KERI reported that last year, Korean companies overseas repatriated 1.9 trillion won less last year than in the previous year. This reduced Korea’s GDP by 0.09 percentage points.

In total, the higher tax rate has reduced the GDP by 1.12 percent.

A contracting GDP has shrunk the annual incomes of 19.7 million workers in Korea.

The report estimated that when the GDP shrinks 1.03 percent, income given to all employed Koreans shrinks between 12.8 to 14.6 trillion won.

“Investments outside of Korea are growing with higher corporate taxes and anti-corporate and labor-friendly policies,” said Cho Kyung-up, senior researcher at KERI.

“There’s an urgent need to improve the investment environment in Korea.”

The Korean government last month announced a tax reform plan that would offer bigger tax credits for corporate R&D investments including expanding the fields that will be eligible.

“However, to improve productivity, investment tax credits are not enough,” Cho said. “The government needs to lower the corporate tax rate to less than that of the United States in order to prevent investments from going overseas and increase household incomes.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]