Quasi-Taxes Keep Growing—Stop Squeezing Businesses

Taxes that are not taxes—quasi-taxes—are making life harder for businesses and increasing the burden on the public. In addition to taxes relative to the income they earn, companies must also pay large sums to the state under the name of quasi-taxes, and that burden is ultimately borne by the public through higher costs to investors and consumers. It is time to reconsider why quasi-taxes continue to grow.

President Moon Jae-in, during the 2017 presidential campaign, said in a campaign pledge that he would create a “law banning quasi-taxes on large corporations.” He even specified the scale of the quasi-taxes he intended to eliminate, saying, “The quasi-taxes paid by large corporations in 2015 alone reached 16.4 trillion won (15 trillion won in statutory charges and 1.4 trillion won in involuntary donations).” Yet five years later, the scale of quasi-taxes is actually increasing. It is doubtful whether any real effort was even made to reduce them.

Quasi-taxes are not taxes, but they are financial burdens that citizens and businesses are required to pay to the state or public institutions, much like taxes. They are divided into quasi-taxes in the broad sense and quasi-taxes in the narrow sense. Quasi-taxes in the broad sense refer to all non-tax monetary burdens imposed compulsorily on the public, including statutory charges and involuntary donations. Quasi-taxes in the narrow sense exclude from this broader category monetary burdens arising from a causal relationship between benefit and cause, and refer to the portion borne by businesses.

For businesses, quasi-taxes are a major burden. According to data from the Federation of Korean Industries, corporate quasi-taxes amount to 62.5% of net income for the term. Looking at changes in corporate net income for the term and the increase in quasi-taxes in the narrow sense borne by businesses from 2008 to 2020, the data show that quasi-taxes in the narrow sense continued to rise even when corporate net income for the term declined. Over 12 years, they more than doubled, reaching about 72 trillion won—1.3 times the total corporate tax revenue of 55.5 trillion won in the same year.

Companies in Korea pay enormous sums every year under various quasi-tax items, including donations for disaster relief, contributions to help disadvantaged neighbors, sponsorships for government projects, and support for civic and social organizations. On the surface, this may appear to fulfill corporate “social responsibility,” but because it often runs contrary to free will, it actually hinders business activity. The burden of quasi-taxes weakens companies’ ability to survive and their capacity to invest for the future, while significantly infringing on shareholders’ interests. It is also reflected in product costs, passing harm on to consumers.

In one actual case, a company planned to spend 300 billion won to expand a factory, but halted the project after being told to pay 185 billion won in development restriction zone conservation charges. At the time the factory was originally built, the area had not been a development restriction zone, but because it was designated as one later, the company was required to pay the charge. This shows how quasi-taxes have markedly worsened the predictability of the business environment.

At a time when companies are already struggling because of quasi-taxes, there are even moves to increase the burden further. Examples include the Social Solidarity Fund Act, which the Democratic Party has been pursuing under the pretext of raising funds from businesses and individuals to help low-income groups, the unemployed, and non-regular workers, as well as the profit-sharing system, under which large corporations would have to share profits exceeding target earnings with their partner small and medium-sized enterprises.

Over the past five years, the pace at which tax and quasi-tax burdens on the Korean people have increased has been excessively rapid. Because a sharp rise in tax burdens leads to a decline in private-sector economic vitality, efforts to increase quasi-taxes further should be avoided. Moreover, if the quasi-tax burden on businesses rises even more amid the COVID situation, a vicious cycle of economic downturn will follow. If we are to enhance corporate vitality and revitalize the economy, now is the time to drastically reduce quasi-taxes.

Unlike taxes, quasi-taxes are less transparent in execution, which can invite arbitrary operation by the government. They also have major negative effects in making government activity more discretionary and lax. Given the serious concerns surrounding quasi-taxes, the government should reexamine all quasi-taxes from the ground up and undertake bold reforms to sharply reduce those that are unnecessary.

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Original title: 멈추지 않는 준조세, 기업 옥죄기 멈춰야

Author: Sung-no Choi

Date: 2022-02-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24538