Under pressure from the ruling Grand National Party, the government has finally agreed to pull back on the planned tax cuts for large corporations and high-income individuals. Finance Minister Bahk Jae-wan, emerging from a meeting with top GNP officials on Wednesday, said the government would not pursue the controversial tax cut scheme.
Bahk said this decision would be reflected in the government’s tax bill for 2012, which will be soon submitted to the National Assembly for approval. The government has thus shredded what remains of President Lee Myung-bak’s supply-side growth strategy dubbed the “MBnomics.”
Under Lee’s tax cut program introduced in 2008, the government had lowered the corporate tax rate for companies with a taxable income exceeding 200 million won a year from 25 percent to 22 percent and was set to cut the rate further to 20 percent starting next year.
The government had also planned to reduce the income tax for people in the top bracket ― those earning more than 88 million won a year ― from the previous 35 percent to 33 percent from 2010, but the adjustment was delayed to 2012.
The rationale for the tax cuts was that they would increase investment and consumption, boost output and accelerate economic growth. But the scheme was attacked by opposition parties as merely benefiting big corporations and affluent people without any tangible job creation effect.
This criticism gained traction with the electorate amid deepening economic polarization. Hence some GNP lawmakers began to call for brakes on the tax cut plan. They demanded that the government halt the scheduled tax cuts and use the additional revenue to expand welfare programs.
The administration succumbed to the pressure from the ruling party. But regarding corporate tax cuts, it proposed to apply 22 percent only to firms with a taxable income of more than 50 billion won a year, while lowering the rate to 20 percent for firms whose income ranges from 200 million won to 50 billion won. This proposal is intended to benefit small and medium-sized enterprises.
As a result of the shift in tax policy, tax revenue forecasts have risen by 2.8 trillion won in 2013. Minister Bahk said the government would use it to shore up the nation’s fiscal health and expand welfare benefits for low-income people.
Thus, the revenue increase will help the government attain its revised goal of reaching a balanced budget by 2013, one year ahead of its original budget management plan. President Lee instructed the change in August after witnessing the sovereign debt crises in the eurozone and the United States.
It will also strengthen the hand of the ruling GNP in the general elections in April by helping it dodge the scathing criticism from the main opposition Democratic Party that it is a party for the rich and big businesses.
But the policy change seriously undermines the credibility of the government, given that the tax cuts had been announced years ago. Companies that took them into account in drawing up their business plans for 2012 would have to make changes accordingly.
Furthermore, the policy U-turn runs against the global trend toward lower corporate taxes. Countries around the world have been competitively cutting corporate taxes to attract foreign investment.
More importantly, the decision to retract the corporate tax cut ignores the finding of a recent OECD study, which says corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes. If the government lets lawmakers pursue welfare at the expense of growth, the outcome will be dire for the nation.
