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Proposed tax hikes may trigger capital outflow, job cuts: report

2016/11/30 17:01

SEOUL, Nov. 30 (Yonhap) -- Proposed tax hikes in South Korea will likely lead to a drop in foreign investment here that may in turn cause significant cuts in growth and jobs, especially when the new U.S. administration under Donald Trump is widely expected to slash its own tax rates, a report suggested Wednesday.

The report from local think tank Korea Economic Research Institute (KERI) insisted the envisioned tax cuts in the United States alone will cause South Korea's gross domestic product (GDP) to shrink 1.9 percent over the next 10 years as more will likely choose to invest in the United States than in South Korea.

The report predicted foreign investment in South Korea to shrink by an average 3 percent per year for the next decade, causing up to 107,000 jobs here to disappear over the cited period.

Such an outlook comes as the U.S. president-elect has vowed to cut his country's corporate tax rate to a maximum 15 percent from the current 35 percent.

South Korea, on the other hand, is moving to increase its maximum corporate tax rate from the current 22 percent to 25 percent.

"If we raise our tax rate to a maximum 25 percent while the U.S. lowers its to 15 percent as pledged by Trump, our corporate tax rate will be set at 10 percent higher than that of the U.S. And once that happens, our capital outflow will greatly increase, leading to a large drop in foreign investment here," the report said.

The file photo, taken on Nov. 3, 2016, shows members of the parliamentary finance committee beginning their review of 317 legislative bills that include one aimed at raising the maximum corporate tax rate to 25 percent from the current 22 percent. (Yonhap) The file photo, taken on Nov. 3, 2016, shows members of the parliamentary finance committee beginning their review of 317 legislative bills that include one aimed at raising the maximum corporate tax rate to 25 percent from the current 22 percent. (Yonhap)

The report came shortly after the country's National Assembly speaker sent nine bills aimed at increasing corporate and income tax rates to related committees for consideration in line with the government bill on 2017 budget.

The report argued the country's GDP may shrink by as much as 5.4 percent with 382,000 jobs disappearing should Seoul raise its tax rates while Washington moves in the opposite direction.

"If the U.S. does lower its maximum corporate tax rate to 15 percent, it will speed up capital inflow to the United States, which will prompt other countries to lower their own tax rates to prevent capital outflow," it said.

"Should the proposed bills on tax hikes be enacted, our country will face great difficulties in such a global competition to attract foreign investment by offering lower tax rates," it added.

The report also insisted government efforts to boost its tax revenues must focus on increasing transparency as to find more sources of taxable income, noting only 71.5 percent of workers and businesspeople are currently imposed composite income tax, compared with 97.2 percent of Britain and 72.3 percent of Singapore.

bdk@yna.co.kr

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