"If Corporate Tax Burden Decreases by 1%P, Facility Investment Increases by 6.3%"

Hankyung Research Institute 'Impact of Corporate Tax Rate on Facility Investment'
3rd Highest Corporate Tax Revenue to GDP Ratio Among OECD Countries

[Asia Economy Reporter Dongwoo Lee] A survey found that lowering the corporate tax burden by 1 percentage point increases corporate facility investment by 6.3%. It is argued that corporate tax rates should be reduced in line with international trends to revive companies' investment motivation and vitality.

The Korea Economic Research Institute (KERI) announced on the 3rd that facility investment experienced negative growth for two consecutive years (2018-2019) after the highest corporate tax rate was raised by 3 percentage points in 2018, based on its analysis titled "The Impact of Corporate Tax Rates on Facility Investment and International Comparison of Corporate Tax Burden Levels."

KERI predicted that the increase in the highest corporate tax rate in 2018 played a certain role in differentiating domestic and overseas investment performance, based on a comparison of facility investment and overseas investment growth rates over the recent four years (2016-2019).

While the domestic facility investment growth rate decreased for two consecutive years after the corporate tax rate hike, the overseas investment growth rate showed an increasing trend for two consecutive years, rising from 11.8% in 2017 to 13.9% in 2018 and 24.2% in 2019. Accordingly, KERI stated, "Although various factors affect facility investment, it appears that the impact of the corporate tax rate increase was significant."

The tax burden on domestic companies was also found to be high compared to member countries of the Organisation for Economic Co-operation and Development (OECD). Over the past 10 years (2011?2020), the increase in the highest corporate tax rate in Korea was 3.3 percentage points (including local taxes), ranking 4th among OECD countries.

During the same period, among the 37 OECD countries, eight countries including Chile, Latvia, Greece, and Korea raised their corporate tax rates, while 19 countries such as the United States, Japan, and the United Kingdom decided to lower them. Ten countries, including Australia, maintained the same tax rates.

Korea ranked high among OECD countries both in the speed of tax burden increase and in absolute levels. As of 2018, the ratio of corporate tax revenue to gross domestic product (GDP) was 4.5%, ranking 6th in the OECD, and the share of corporate tax revenue in total tax revenue was 15.7%, ranking 3rd in the OECD after Colombia and Chile.

KERI pointed out that corporate tax rates affect corporate investment returns, and in a situation where countries worldwide are attempting to lower rates to attract businesses, policies to raise corporate taxes run counter to global trends.

Furthermore, it expressed concern that the high level of corporate tax burden could weaken the functions and roles of companies, which should be creating jobs and driving economic growth.

Choo Kwang-ho, Director of Economic Policy at KERI, said, “Raising the highest corporate tax rate at a time when economic vitality is weakening and the economy is entering a low-growth phase is a prescription contrary to the diagnosis of ‘entering a low-growth phase.’” He added, “Even now, we should participate in the international trend of easing tax burdens by lowering corporate tax rates to boost corporate investment motivation and revive growth vitality.”

This content was produced with the assistance of AI translation services.