[Opinion] Cutting Corporate Tax as a Breakthrough for Better Business Conditions

It has been pointed out that high corporate taxes have dampened investment activity by Korean companies and driven down their motivation to conduct business. In response, the government lowered the corporate tax rate by 3 percentage points to ease the tax burden. The goal was to revitalize corporate activity, which had been stifled by high tax rates, encourage more aggressive business investment, and generate positive effects for market growth.

The previous administration’s policies ran counter to the global trend of cutting corporate tax rates. Over the past five years, among the world’s five major economies, France, the United States, and Japan each lowered their top corporate tax rate once. Germany and the United Kingdom have maintained rates in the mid-to-high teens, which remain below average. By contrast, South Korea raised corporate taxes over the past five years, showing a stark difference from these countries.

The previous corporate tax rate of 25% exceeded the OECD average top corporate tax rate of 21.5%. As of 2016, Korea’s corporate tax revenue amounted to 3.6% of GDP. This already far surpassed the OECD average of 2.8%, meaning there was effectively no justification for raising corporate taxes further. Nevertheless, the corporate tax rate continued to rise.

The global trend toward lowering corporate tax rates is entirely natural. By reducing corporate taxes, which are directly tied to business investment, countries seek to boost investment. Corporate willingness to invest and job creation tend to increase when tax burdens decline, which is precisely why such policies are being pursued. If lower corporate tax rates stimulate business investment, they can also be expected to contribute significantly to a market recovery.

Accordingly, the Yoon Suk Yeol administration, launched in May of this year, has taken its first step toward rescuing Korean companies, which have been driven into a corner by high tax rates. It lowered the corporate tax rate, which had stood above the OECD average, and adjusted the complicated tax base brackets. The top rate, previously 25%, was cut to 22%, and the tax brackets were also simplified from four tiers to two or three. This is expected to boost corporate willingness to invest and enable more active investment activity.

Especially in times of economic crisis, tax cuts appear to be an effective response for stimulating the economy. The corporate tax reform proposal is intended to ease the excessive burden that had long been imposed on companies and to allow corporate tax savings to serve as a catalyst for economic growth. Some have even argued that, since the government is already attempting a rate cut to restore weakened business investment and economic vitality, it should pursue the policy more boldly.

Many companies have struggled under an abnormally high corporate tax rate. Amid intensifying global competition for economic dominance, exacerbated by global supply chain problems, I hope that a lower corporate tax rate will give Korean companies some much-needed breathing room.

Jihyun Shim, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 법인세 인하는 기업 경영여건 개선의 돌파구

Author: Ji-hyun Shim

Date: 2022-10-31

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=7&idx=25046