[Tax Story] The Role of Taxes in Preventing a Second Daejang-dong Scandal

Professor Ahn Chang-nam, Department of Taxation, Gangnam University

Numbers are rampant. 5 billion won in retirement pay, 400 billion won in dividends, 47.3 billion won in temporary receipts, and so on. It feels like watching a vulture fight over the remains of prey left by a lion on the African savannah.

Most of the characters involved are graduates of prestigious universities and have passed the bar exam. Their skills in stealing prey surpass those of common street thugs. Not only are they “runners and flyers,” but as the title of a certain movie suggests, there are plenty of “good guys, bad guys, and strange guys.”

From the perspective of taxes, Daejang-dong’s process of “land expropriation → redevelopment → sale” is similar to other redevelopment projects. The guardian of the legitimate transaction stages (the “daejang,” or captain) is the tax system. Since the current top income tax rate is 49.5% (including local taxes), the state takes half of the profits at each transaction stage (shareholders of the redevelopment corporation also pay income tax on dividends). Because of this, some contracts are abandoned out of fear of taxes, and people shrink back nervously when passing by tax offices fearing audits.

However, Daejang-dong is different. It is said that the transaction price is fixed including taxes. For example, if the plan is to take 3 billion won in labor costs, an additional 2 billion won in taxes is added, making it 5 billion won in total. The redevelopment operator pays less corporate tax because labor costs increase. This money is raised by either acquiring land cheaply or setting high apartment sale prices.

Because there are many shady corners, money is spent to silence various parties. Prosecutors, court chiefs, and former members of the National Assembly entangled through various connections discreetly take their share of redevelopment profits. It resembles the “clique spirit” seen in the drama Squid Game.

Legal technicians who are former prosecutors or judges, who wriggle through loopholes like eels, hit the jackpot with an investment of 350 million won and dividends of 404 billion won?a 1,154-fold return. The response that “it was done according to the law and is just a high risk & high return phenomenon” is a typical excuse from such people, but even compared to Gi-hoon’s 45.6 billion won (the final winner of Squid Game, who risked 100 million won per participant), it is excessive. Just because the law permits or overlooks it does not mean it is right.

Tax law recognizes appropriate expenses as costs, but excessive expenses made with the “clique spirit” in mind (for example, if a certain person receives 2 billion won in labor costs while a colleague doing the same job receives 500 million won, the 1.5 billion won difference) are not recognized as corporate expenses (Article 26 of the Corporate Tax Act). Then, is that 1.5 billion won a bribe? It is difficult to judge. Current tax law only collects 49.5% of that 1.5 billion won as income tax, and the rest remains with the recipient. Since the recipient pays taxes on the 1.5 billion won anyway, the effect of tax audits is also diminished.

Daejang-dong is a place where legal technicians cleverly bypassed the tax “vaccine” and created chaos, a so-called “breakthrough infection.” Under current regulations and systems, taxes cannot serve as the guardian of Daejang-dong. There is a Roman law maxim: “He who benefits must also bear the burden.”

Looking at Daejang-dong reminds one of the “Unjust Enrichment Tax Act,” abolished in 2007. When rent or fees exceeding government-set prices were collected, the entire excess was taxed to stabilize prices. If this were applied to the “clique” members of Daejang-dong, the profits exceeding market value (the above 1.5 billion won) could be regarded as unjust enrichment and fully reclaimed through taxation.

Changnam Ahn, Professor of Taxation, Gangnam University