[Special Contribution] Korea's Habit of Changing Corporate Tax Rates with Every Administration Change?

Corporate Tax Is No Longer Just a Tax on the Rich
A Broader Tax Base Is Needed to Sustain Growth

Corporate profits earned over a year ultimately accrue to shareholders, making them a typical form of capital income. The assumption that most people who invest in corporations belong to high-income groups has reinforced the perception that corporate tax, which is levied on company profits, is a tax paid by the wealthy. However, recent statistics showing that the number of stock investors in Korea reached a total of 14.1 million as of the end of last year easily reveal that this perception does not align with objective facts. These days, not only the middle class but also the economically vulnerable, including ordinary citizens and young people, are actively participating in the stock market.

Therefore, despite recent changes, the argument that raising corporate taxes amounts to taxing the rich and contributes to income redistribution is overly simplistic. The economics community recognized early on that the burden of higher corporate taxes does not fall solely on high-income groups, and has long warned that corporate tax is not an appropriate tool for enhancing vertical equity. Moreover, because corporate tax has complex tax incidence effects, it influences a wide range of groups, making it difficult to predict its overall economic impact. It is now becoming common knowledge that, in addition to shareholders?who include both wealthy individuals and ordinary people?corporate tax also significantly affects employees and consumers who purchase the company’s products.

Since corporate profits represent a portion of the value added generated directly through the production process and are a core component of gross domestic product (GDP), it is only natural that taxation should be approached differently from other forms of capital income, such as returns from financial or real estate investments. This is why, for about 20 years around the 2000s, countries around the world engaged in fierce tax competition and lowered corporate tax rates in an effort to expand their own productive capacities, even if only slightly. Although the effectiveness of corporate tax cuts in boosting investment and employment has gradually diminished, major economies still tend to postpone raising corporate taxes unless there are no alternatives.

The greatest challenge facing the Korean economy, which is now said to be entering an era of slow growth and accelerating aging, is to strengthen its growth potential. This is because the economy must continue to grow in order to meet the ever-increasing demand for welfare. The fact that the Lee Jaemyung administration has set aside its basic income policy to focus on growth and pledged to achieve a potential growth rate of 3% reflects this shared understanding. While it may be possible to temporarily maintain the current level of welfare through debt, welfare financed by borrowing cannot be sustained for even 10 years and only leads down the path to decline. Ultimately, the key is to revive the dwindling engine of growth.

For example, could a policy of boosting domestic demand by increasing household consumption through government spending be the answer? Considering the production capacity of Korea’s leading companies, which have grown large enough to compete in the global market, this is unrealistic. Unless our companies can export to markets like the United States or China?or at least to India or ASEAN (Association of Southeast Asian Nations)?their survival is at stake. Only by enhancing international competitiveness through technological innovation, regulatory reform, and maintaining a corporate tax burden below the average of competing countries can Korea’s growth engine be sustained and strengthened. If, after lowering the corporate tax rate by just 1 percentage point?albeit briefly?due to an outdated “tax the rich” narrative, the government raises it again just three years after the new administration takes office, who will believe its “growth-oriented” policy? Rather than abruptly reversing tax rates with every change of administration, it is wiser to prioritize tax base expansion measures, such as reducing exemptions, until the time comes when both households and companies must shoulder increased tax burdens to secure substantial revenue growth.