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(News Focus) S. Korea implements tax hike policy to back income-led growth

2017/08/02 15:00

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By Kim Boram

SEJONG, Aug. 2 (Yonhap) -- The first tax code revision by the Moon Jae-in government involves a hike of both income and corporate taxes, a signal that South Korea will pursue an expansionary fiscal policy stance to spearhead income- and consumption-led economic growth, analysts here said Wednesday.

The income tax rate for those whose taxable income exceeds 500 million won (US$445,700) will be raised from the current 40 percent to 42 percent, with people in the new income bracket of 300-500 million won to be subjected to a tax rate of 40 percent, according to the Ministry of Strategy and Finance.

At the same time, the government will create the highest corporate tax bracket for companies with taxable income exceeding 200 billion won and above that will be subject to rates of 25 percent. Companies earning 20-200 billion won will be required to pay the current rate of 22 percent.

The changes did not touch the value added tax rate that affects all individuals.

It is the first time in five years that the government has raised the maximum income rate, while the last corporate tax hike took place in 1990.

The move seems to be a drastic turnaround from the decadelong tax-cut policies by the two previous presidents to boost Asia's fourth-largest economy, which has been in a protracted slump for years.

The conservative Lee Myung-bak government (2008-2012) lowered the income tax rate in 2009 to encourage businesses to engage in more economic activities, while former President Park Geun-hye pledged to expand social welfare programs without raising taxes.

However, the incumbent Moon administration sees such policies as deepening the income polarization and weakening the fiscal role in redistributing wealth. It said it is time for rich people to pay more for job creation and social welfare expansion.

The government said it adjusted tax rates for wealthy people and businesses that can afford to pay more to finance President Moon's pledges on job creation and welfare expansion, which are estimated to cost 178 trillion won during his five-year term.

Moon's economic policies are based on the principle of "income-led growth," which calls for increasing household income and spending with the help of various policy tools to fuel sustainable economic growth.

They seek balanced and sustainable growth by focusing more on people as a leading economic driver and less on businesses, which have led economic development for the past decades.

The latest tax hike targets 93,000 superrich people, which include some 20,000 high-paid workers and around 29,000 who inherited their wealth, along with 129 top money-making companies. Money collected from these people can help the government bring in an additional 6.27 trillion won in revenue every year over the next five years.

But experts point out that the latest tax hikes will not guarantee enough revenue to meet the government's plans to expand social welfare spending.

Also, a growing number of companies may go abroad to seek lower corporate taxes and higher benefits, which can result in a contraction of business activity throughout the economy and a drop in corporate tax revenues. This can, moreover, lead to fewer jobs, which can hurt long-term growth.

"An increase in the corporate tax for large business will likely affect smaller companies and their income will also drop. Then, the total corporate tax earnings could backtrack," said Hong Ki-yong, a professor from Incheon National University. "The government may fail to reach its target tax collection target."

   Moreover, some economists are predicting that the government will be compelled to increase the general tax burden for ordinary people, including adjusting the value added and income taxes.

Separate data showed that some 46.5 percent of 17 million wage earners in the country were exempted from paying income tax in 2015 as income tax deduction programs give higher deduction rates to low income people.

"If the government needs more money, it can take the risk of incurring a fiscal deficit for a while to help the economy come out of the low growth cycle," said professor Jeong Se-eun from Chungnam National University. "But it should make more efforts to restructure its spending system and save taxpayers' money first as it expands welfare services."

   brk@yna.co.kr

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