[Tax Story] Unification Costs and Unification Tax, Let North and South Build Together

Professor Ahn Chang-nam, Department of Economics and Taxation, Gangnam University

With the inauguration of U.S. President Joe Biden, North Korea?U.S. relations and the situation on the Korean Peninsula have entered a new phase. In any case, the ultimate direction of change must be peaceful unification. This is because both South and North Korea have explicitly stated this in their highest norms, the constitutions (Article 4 of the South Korean Constitution and Article 9 of the North Korean Constitution).

However, the specific implementation plans differ between the two Koreas. South Korea proposed a step-by-step and gradual plan in the "Plan for National Community Unification" announced on Liberation Day in 1994, which outlined the stages of "reconciliation and cooperation → confederation (two systems, two governments) → unified state (one system, one government)." North Korea’s practical plan, which suggested a lower-level federation in the 2000s, is unknown (hence it has been criticized for not abandoning military unification).

Peaceful unification and finance are two sides of the same coin. Unification without financial support could lead both South and North Korea into economic difficulties.

South Korea is preparing a fund for inter-Korean cooperation to cover the costs of the first stage, reconciliation and cooperation. However, the answer to how to finance the costs required during the confederation and unified state stages remains blank (the same applies to North Korea).

At this point, financial experts from both South and North Korea should come together to pool their wisdom. In fact, since the benefits of confederation or a unified state would be enjoyed not only by South Korea but also by North Korea, if the unification costs are fairly shared by both sides based on the beneficiary-pays principle, it would not only change the negative perception of unification among young South Koreans who find the costs burdensome but also alleviate North Korea’s concerns about “absorption unification.”

Germany (then West Germany) also prepared the conditions for unification during the division period through a quasi-tax called the supplementary burden, and after unification, it introduced a “solidarity surcharge” by adding 5.5% to the income tax and corporate tax of all taxpayers in East and West Germany to finance unification costs.

During the confederation stage, let us consider the European Union (EU) member states’ fiscal consolidation measures as a model, and at the unified state stage, consider introducing a “unification tax” (tentative name) modeled after Germany’s solidarity surcharge. What money does North Korea have? It possesses underground resources estimated to be worth trillions of won. The unification tax would be fairly levied on income (South Korea) and underground resources (North Korea), each with comparative advantages, and structured with tax rates sufficient to cover unification costs.

No parent would give up treatment because of the considerable surgery costs (unification costs) when their child is sick and needs to go to the hospital. The happiness (unification benefits) the child will bring to the parents after treatment will be thousands of times the surgery costs. In this regard, former President Park Geun-hye’s remark that “unification is a jackpot” is not wrong.

Historically, taxes have been catalysts for uprisings and revolutions, advancing human rights or leading to the birth of new nations. The American Revolutionary War, the French Revolution, and the Korean Donghak Peasant Movement are such examples. The unification tax can be a seed for peaceful unification of the two Koreas.

If South and North Korea, armed with the wisdom of serpents and the innocence of doves, can see through the great powers’ attempts to sabotage unification and find the national lifeline, and propose concrete unification plans and reasonable financing methods, the Biden administration and the international community will accept and join in.

The line from a poet that “the land’s end is not the end but a new beginning” can also apply to the frozen and seemingly ending inter-Korean relations. Since the unification tax is essentially a sensitive topic related to the increase or decrease of property among members of both Koreas, it is sufficient to drive the start of unification.

Changnam Ahn, Professor of Economics and Taxation, Kangnam University

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