[Insight & Opinion] Polarization: The Pros and Cons of Inflation

Land does not simply mean soil. It symbolizes status and signifies power. Therefore, changing the long-standing order tied to land is not easy. The inequality in land distribution in Latin America has long been the greatest threat to growth. Latin America failed in land reform and thus could not lay the foundation to become an advanced nation. Market advocates such as Adam Smith, David Ricardo, and John Stuart Mill also viewed the landlords' monopoly rents negatively. They believed that landlords' profits hindered the development of capitalism and obstructed capital accumulation, slowing the transition to an industrial society. This idea was central to the 19th-century American political economist Henry George. He attributed the persistent poverty of labor and capital, despite economic prosperity from population growth and technological development, to the rents collected by landowners.

South Korea and Taiwan, which succeeded in land reform, had U.S. involvement from the early stages. During the Cold War, securing the support of farmers was necessary to establish stable anti-communist states. Could it be an exaggeration to say that the land reform achievements in South Korea and Taiwan paved the way for industrialization? Consider this: after the establishment of the Republic of Korea, is it reasonable that six large landowners controlled the entire country's land? Through land reform, tenant farmers gained cultivation rights, and the amount of farmland each household could hold was limited. Excess farmland was purchased by the state through bond issuance. Inflation caused by the Korean War led to a 16-fold increase in prices, rendering the bonds worthless, and tenant farmers effectively hit the lottery. Although the war was a tragedy, it eliminated polarization and brought about the miracle of social mobility. In a way, it was a truly fortunate inflation.

In 2022, I think about the middle class and vulnerable groups suffering amid global inflation. In economics, there is something called the misery index. It is the sum of the unemployment rate and inflation rate at a given point in time, representing the national pain index. High inflation causes significant harm. Complaints are heard that it is difficult to have lunch for 10,000 won. The Engel index, which measures the proportion of food expenses in household consumption expenditure, reached a record high of 12.86% in December 2021. It is expected to rise further this year. If this situation continues, the pain of the middle class and lower will increase more than that of the high-income class.

Severe inflation is a silent tax thief. To control it, rational policies must be implemented. Tax brackets and various deductions should be adjusted realistically, considering the glass wallets of salaried workers and inflation. It is not right to impose excessive taxes on citizens whose main asset is a single home. Many countries do not impose inheritance tax as a form of double taxation. Communist China has no inheritance tax. In the U.S., the exemption limit for inheritance and gift tax has increased 11.7 times to $11.7 million compared to 2010. This contrasts with Korea, which has the world's highest inheritance and gift tax rates but does not even consider inflation adjustments for tax bracket revisions.

In an aging society, the wealth of retired generations should properly transfer to economically active generations. This will have a positive effect on production and consumption. This is not to advocate hereditary capitalism but to consider issues of double taxation and human desire. The system originally intended for the wealthy has now become a system that traps the middle class. South Korea’s property tax has quietly crossed a critical threshold when various factors are considered. The credit crunch caused by real estate could become a time bomb. Real estate-related tax systems that restrict freedom of residence and impose punitive taxation are not right. I hope that this opportunity will lead to tax reform aligned with global standards.

Wonkyung Cho, Professor at UNIST / Director of the Global Industry Cooperation Center