[Free Speech] How Should the Corporate Tax System Be Reformed?

What is needed to create a vibrant business environment? In his July 4 briefing on the economic policy direction for the second half of the year, President Yoon Suk Yeol presented measures aimed at restoring business vitality. It appears that the government will seek to preserve the intent of laws such as the Serious Accidents Punishment Act while revising toxic provisions that effectively block corporate investment at its source. Accordingly, interest in and expectations for corporate tax reform have also risen.

How does Korea’s corporate tax differ from that of other countries? Compared with neighboring countries, Korea’s corporate tax rate and dependence on corporate tax revenue are both very high. Corporate tax refers to “a tax imposed on corporate income.” Unlike other countries, Korea’s high corporate tax rate is increasing the burden on businesses. As the tax burden on firms rises, their willingness to invest is being dampened.

Korea ranks 10th highest in the top corporate tax rate among the OECD’s 38 member countries, placing it near the top. Despite already being relatively high compared with neighboring countries, the corporate tax rate has continued to trend upward. As a result, Korea’s corporate tax competitiveness has consistently ranked low among the 38 OECD countries, and last year it fell to 34th, near the bottom. The U.S. Tax Foundation pointed to Korea’s high tax rate itself, as well as the many conditions attached to tax benefits, as the reason.

The problem of an increasing concentration of the tax burden on businesses due to the high corporate tax rate and heavy reliance on corporate tax revenue is growing by the day. In fact, firms in the top 0.1% by corporate income were found to have paid more than 64% of the total taxes borne by all corporations in 2021. Samsung Electronics alone, in particular, paid as much as 12 trillion won in taxes in Korea. The growing tax burden on large leading firms should also be considered in connection with excess tax revenue. Corporate tax contributed to the surplus because 17 trillion won more than originally projected was collected. Most of this excess revenue is believed to have come from top large corporations.

How, then, can the problem of shifting the tax burden onto businesses be resolved? There are two main ways to reform the corporate tax system.

First, the limit on loss carryforward deductions for corporate losses could be raised. This system allows losses incurred by a business in one year to be carried forward to the following year and deducted from income, thereby reducing the tax burden. In major countries such as the United States and China, there is generally no cap on loss carryforward deductions, or even where there is a cap, the deduction period is not limited. Considering this, raising the loss carryforward deduction limit would likely help businesses overcome economic crises and regain vitality.

Second, the minimum tax system could be abolished. The minimum tax is a system that sets the minimum amount of corporate tax a firm must pay. The problem is that no matter how much a firm receives in tax deductions, it must still make an additional payment under the minimum tax system, which in effect increases the burden on businesses. If this system were abolished, it would prevent firms from being unable to fully enjoy tax support benefits because of the minimum tax.

The expected effects of “raising the loss carryforward deduction limit” and “abolishing the minimum tax system” are increased corporate investment and employment, along with the resulting trickle-down effect. In addition, these measures are expected to stimulate corporate spending, promote overall economic growth, and offset the decline in tax revenue caused by lower tax rates.

As the corporate tax system is a crucial institution that affects both tax fairness and efficiency, it should be reformed fairly so that the tax burden is not shifted onto particular firms. Furthermore, reform of the corporate tax system will contribute to revitalizing the free market economy and ultimately bring greater vitality to society.

Mina Oh, Research Intern, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 법인세제, 어떻게 개편돼야 할까?

Author: Min-a Oh

Date: 2023-12-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=5&idx=26292