[fn Editorial] Shift to Corporate Tax Increase, Need to Consider Business Conditions

The government is reversing the tax reduction policy of the previous Yoon Seok-yeol administration and is pursuing measures to increase taxes, such as raising the corporate tax rate. This was mentioned by Deputy Prime Minister Koo Yoon-cheol, who is also the Minister of Strategy and Finance, during a hearing, and it is said that it will be announced as early as the end of this month. The plan is to revert the maximum corporate tax rate, which was lowered by 1%p due to the 2022 tax law amendment, back to 25%.

The government's policy shift is likely due to financial difficulties caused by reduced tax revenue. The tax revenue shortfall due to economic downturns over the past three years amounts to 97.5 trillion won. During this period, corporate tax revenue plummeted by 40%, from about 100 trillion won to 60 trillion won. The government seems to believe that the significant decrease in corporate tax revenue is largely due to the tax rate cut.

The government also seems to think that the effect of the tax rate cut, which was justified by the need to stimulate businesses and the economy, has not materialized, thus failing to achieve policy objectives. Deputy Prime Minister Koo, who is also the Minister of Strategy and Finance, said, "Upon review, the reduction in corporate tax resulted in decreases in growth, consumption, and investment." The ruling party also claims that despite the reduction in corporate tax, companies did not increase employment and investment but only accumulated internal reserves.

National finances are directly affected by economic conditions. The tax revenue shortfall and decrease over the past three years are due to the global economic crisis. It is natural that corporate profits decreased and, consequently, corporate tax revenue decreased. Of course, the tax rate cut clearly accounts for a portion of the decrease in corporate tax revenue.

However, if investment has decreased, the main reason, like the decrease in corporate tax revenue, is the recession. In an economic downturn, companies usually reduce investments and become cautious. Raising the corporate tax rate in the current economic crisis will further shrink investments. It could particularly deter foreign investments. When the Moon Jae-in administration raised the maximum corporate tax rate from 22% to 25% in 2018, facility investments decreased by 11.9%.

It is incorrect to say that Korea's corporate tax rate is low among OECD countries. The average corporate tax rate of OECD countries is 21.5%, which is significantly lower than ours. Major countries around the world are trending towards lowering corporate tax rates as global industrial competition intensifies.

If the government chose to increase corporate taxes as an easy means to cover fiscal deficits due to less tax resistance, it is a mistake. While raising corporate taxes may temporarily increase tax revenue, in the medium to long term, it will stifle business activities, resulting in more harm than good. Companies may prefer overseas investments over domestic ones, leading to capital outflow. Frequent tax rate adjustments can undermine trust in the Korean market and cause foreign investors to exit the stock market.

In difficult economic times, it is appropriate to reduce various populist policies and respond by cutting expenditures. To increase tax revenue, we should find other ways than squeezing businesses, such as reducing populist tax exemptions. Paradoxically, during a recession, it is the right direction to lower tax rates further to help companies conserve energy and bounce back.