[Yoon Administration Economy] Supporting Private-Led Growth through 'Deregulation and Tax Cuts'... Reforming Finance, Pensions, and Public Enterprises

New Government Economic Policy Direction
Corporate Tax Top Rate Reduced from 25% to 22%...Expanded Tax Credits for Semiconductor and Other Facility Investments
All-in on Regulatory Reform...Introducing 'One In, Two Out' Rule to Remove Two Regulations for Every One Added
Shift to 'Sound Fiscal' Policy...Taking Strong Measures on National Pension and Public Enterprise Reforms

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kwon Haeyoung] The core of the Yoon Seok-yeol administration's economic policy direction is summarized as supporting private-led economic growth through 'regulatory reform' and 'tax cuts.' Amid a complex crisis marked by the three highs?high inflation, high interest rates, and high exchange rates?and growing global recession concerns, the government aims to create a business-friendly environment to raise the potential growth rate, which has fallen to the bottom. The plan is to abolish outdated regulations that hinder corporate activities and establish a virtuous cycle of 'investment → employment → growth' by lowering corporate and inheritance taxes, which are higher than those of major global countries, and expanding tax support for key industries such as semiconductors.

On the 16th, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said, "The new government intends to boldly shift the government-led economic management stance to overcome the current complex economic crisis and lay the foundation for overcoming low growth," adding, "We will restore economic vitality and dynamism by shifting economic management from government-centered to private, corporate, and market-centered."

◆ Corporate tax top rate cut from 25% to 22%... Expansion of tax credits for facility investment＝ According to the 'New Government Economic Policy Direction' announced by the government on the same day, the top corporate tax rate will be lowered from the current 25% by 3 percentage points to 22%, and the tax bracket structure will be simplified from the current four tiers to two or three tiers. The new government’s policy is to normalize corporate tax to the 'global standard' level.

South Korea lowered the top corporate tax rate to 22% during the Lee Myung-bak administration in 2008 but raised it back to 25% in 2018 under the Moon Jae-in administration, expanding the tax brackets from three to four tiers. This rate is higher than the average top corporate tax rate (21.5%) of the 38 OECD member countries and deviates from the global trend of a single corporate tax rate system. Among OECD member countries, only three, including South Korea, apply a progressive corporate tax rate system.

Bang Ki-sun, First Vice Minister of the Ministry of Economy and Finance, said, "Corporate investment has been sluggish, and the corporate tax reduction is largely aimed at revitalizing the private sector," adding, "Ultimately, it secures investment capacity and thereby increases the capacity to secure tax revenue." Regarding criticisms of 'tax cuts for large corporations' and 'tax cuts for the wealthy,' Ko Gwang-hyo, Director General of Tax Policy at the Ministry of Economy and Finance, explained, "There are criticisms that the corporate tax rate cut is a tax cut for large corporations, but small and medium-sized enterprises will also benefit," and added, "Applying a progressive tax rate to corporations limits their investment capacity and may cause our companies to fall behind in competition with advanced countries." He emphasized, "Lowering corporate tax promotes corporate competitiveness, and when companies do well, benefits return to the people."

Double taxation on dividends will also be eased. The government operates the 'non-inclusion of dividend income' system under the Corporate Tax Act, which excludes dividends received by one corporation from another corporation from being counted as income. Currently, the non-inclusion rate for dividends received by domestic corporations from domestic subsidiaries ranges from 30% to 100%, depending on whether the company is a holding or listed company, but this will be simplified. Dividends received by domestic corporations from overseas subsidiaries are taxed as corporate tax with foreign tax credits applied, but going forward, they will be excluded from taxation by being considered non-income.

Tax support to activate corporate investment will also be provided. For facility investments in national strategic technologies such as semiconductors, batteries, and bio, the corporate tax credit rate for large corporations will be expanded from the current 6-10% to 8-12%, the same as for mid-sized companies.

[Image source=Yonhap News]

◆ Abolishing sandbags that hold back companies... Introduction of 'One In, Two Out' system＝ The government will actively abolish outdated regulations that hinder corporate activities to strongly support private-led growth. The 'Economic Regulatory Innovation Task Force (TF),' led by the Deputy Prime Minister with ministers of related departments as members, will lead reforms of key economic regulations.

First, to prevent excessive new regulations, the 'One In, Two Out' system will be introduced. This system requires that when new regulations are introduced or strengthened, existing regulations with costs twice as high as the expected regulatory costs must be abolished or eased. The reduction target rate for each ministry will be flexibly set to induce voluntary regulatory reduction, with the reduction target rate adjusted to around 200%.

Regarding economic and employment regulations, when new regulations are introduced or strengthened, a mandatory review deadline will be set to enhance the effectiveness of the sunset regulation system. Legislative bills will also undergo more thorough regulatory impact analysis in cooperation with the National Assembly to ensure quality in lawmaking and amendment processes.

The government will also tackle 'chunk regulations.' It will introduce a 'Regulation One-Shot Solution' to identify and comprehensively revise chunk regulations involving multiple ministries and local governments. The government will also promote the transfer of regulatory authority from the central government to local governments by identifying regulations that can be delegated. To this end, each ministry’s regulatory innovation TF will identify regulations that can be transferred to local governments, and cross-ministerial work will proceed to delegate regulatory authority to local governments.

◆ Shift to 'sound fiscal management'... Public sector reforms including National Pension and public institutions＝ While actively supporting private-led growth, the government will move away from a government-led growth stance based on expansionary fiscal policy. Reforming the pension system, which is facing fiscal depletion, and the bloated public sector will also be key tasks.

First, the government will halt the 'expansionary fiscal' stance driven by COVID-19 response and welfare expansion policies and actively shift to a 'sound fiscal' stance. To this end, detailed standards for new fiscal rules will be established and legislated in the second half of this year. Strong structural adjustments will be pursued not only for discretionary spending but also for mandatory and rigid expenditures that are difficult to reduce by law. The education grant system will also be reformed. According to the Education Grants Act enacted in 1971, 20.79% of domestic tax revenue is automatically allocated as education grants to fund nationwide kindergarten, elementary, middle, and high school education. Considering the declining school-age population and the demand for investment in nurturing future talents, the government plans to expand the use of education grants to higher education such as universities.

The government will also introduce a 'High Financial Risk Institution Intensive Management System' to reform public institutions burdened with debt. First, intensive management will be conducted for institutions with high financial risk. Among 39 institutions that prepare mid- to long-term financial management plans based on business and financial risk indicators such as debt ratio and return on total assets, about 10 institutions will be selected to establish soundness plans according to mid- to long-term financial goals. These plans will include annual debt reduction targets, business restructuring, and non-core asset disposal measures. Investment, personnel, and fund management for these institutions will also be strengthened.

Pension reform will also be a major task. A Public Pension Reform Committee will be established to reform public pensions including the National Pension, private school teachers’ pension, civil servants’ pension, and military personnel pension. Based on the National Pension’s financial calculations, which predict depletion by 2054, a plan to improve the financial soundness of the National Pension will be announced in the second half of next year.