Corporate Tax Cut '6.5 Trillion' Effect Sparks Clash Between Ruling and Opposition: "Investment and Employment Will Increase" vs "Psychology Matters More Than Tax Rate"

Government Projects KRW 6.5 Trillion Reduction in Corporate Tax Burden
Ruling Party: "1%P Cut Leads to 3.6%P Investment Increase"
Opposition: "Corporate Tax Lowered for 7 Years, Yet 0.2%P Decrease"
Ryu Seong-geol: "Employment Induction Coefficient Rises" VS Kim Hoe-jae: "Youth Employment Rate Falls"

[Image source=Yonhap News]

[Asia Economy Reporter Park Jun-yi] The ruling and opposition parties are already clashing over the specific effects of the corporate tax rate reduction. The government plans to submit a revision of the Corporate Tax Act to the upcoming regular National Assembly session to lower the highest corporate tax rate from 25% to 22%. While the ruling party claims this will promote corporate investment and employment, the opposition argues that the causal relationship between the tax rate and investment is unclear. This is seen as the opening act of the tax law amendment debate starting in the regular session in September.

The basis for the claim that lowering the corporate tax rate will have an effect on investment lies in the easing of the tax burden. According to the government's tax law amendment announced on the 21st, the corporate tax burden will be reduced by 6.5 trillion won through tax benefits including the corporate tax rate cut. A reduced tax burden means that the available resources increase accordingly.

In the 'Seven Major Tax Reform Tasks' document delivered by the Federation of Korean Industries to the Ministry of Economy and Finance in May, it was shown that a 1 percentage point reduction in the corporate tax rate could increase corporate facility investment by up to 3.6 percentage points. The ruling party also recently stated in a tax reform consultation with the government that "we requested the government to lower corporate taxes and reform the tax system to secure the capacity for corporate investment and job creation."

Park Hong-geun, floor leader of the Democratic Party of Korea, is attending the Emergency Measures Committee meeting held at the National Assembly on the 22nd and delivering opening remarks. Photo by Yoon Dong-joo doso7@

On the other hand, the opposition holds the view that reducing corporate taxes does not help investment. Lee Yong-woo, a member of the Democratic Party, said, "In 2008, the Lee Myung-bak administration cut the corporate tax rate from 25% to 22%, and while retained earnings of KOSDAQ and KOSPI listed companies increased by 158% and net income by 115%, investment decreased by 0.2 percentage points over seven years." He explained that investment is influenced more by economic sentiment than by available resources. Lee emphasized, "Government finances need to bear a certain level of risk for a transition to occur." He argued that direct government support is necessary rather than corporate tax cuts to increase corporate investment.

The ruling and opposition parties also differ on the impact on employment. The ruling party and government claim that corporate investment increases productivity and ultimately boosts employment. Ryu Seong-geol, an economic expert and member of the People Power Party, explained in a call, "When corporate investment increases, GDP (Gross Domestic Product) increases, and when GDP increases, employment rises."

Conversely, Kim Hoe-jae of the Democratic Party cited an analysis on the correlation between corporate tax and youth employment rates, recently commissioned from the National Assembly Research Service. He argued that during the 2009?2017 period, when the nominal highest corporate tax rate (including local income tax) was at its lowest at 24.20%, the youth employment rate (ages 15?29) was lower than in other periods. He also noted that in 2018, when the highest tax rate rose to 27.50%, the youth employment rate increased to 42.7%.

With the ruling and opposition parties sharply divided, difficulties in the bill review process are inevitable. The opposition has declared that it will firmly block any reduction in national finances caused by corporate tax cuts.

Opinions are also divided in academia. Especially regarding the employment-inducing effect, there are few empirical studies clarifying the relationship, resulting in a lack of reference materials. Professor Jung Se-eun of the Department of Economics at Chungnam National University pointed out, "Most studies simply assume that 'investment leads to employment,' but there is almost no actual research on this. However, with recent advances in corporate automation, it is not possible to definitively conclude a direct employment effect from increased investment."