[Fact Check] Is the 'Corporate Tax Cut' Y-nomics a Tax Break for the Rich?

Opposition Again Attacks 'Tax Cuts for the Rich' Frame
Even with Corporate Tax Rate Cut to 22%, It Remains Higher Than OECD Average (21.5%)
Tax and Fiscal Research Institute: "Raising Corporate Tax by 1%P Reduces GDP by 1.13%P"…Employment Down 0.5%P, Wages Down 0.6%P
MB's Corporate Tax Cut Came During Global Financial Crisis…Interpreted as a Breakwater Role

[Asia Economy Sejong=Reporters Kwon Haeyoung and Gu Chae-eun] Since the Yoon Seok-yeol administration announced that it would pursue economic policies centered on 'private sector-led innovative growth,' controversy over 'tax cuts for the wealthy' has erupted in the political arena. The government intends to stimulate economic revitalization by shifting the weight of economic management, which had been focused on the 'government,' to the 'private sector' through policies such as corporate tax cuts and deregulation. However, the Democratic Party of Korea has launched an offensive, calling this similar to the Lee Myung-bak administration's 'business-friendly' policies, labeling it as 'tax cuts for the wealthy,' 'MB Season 2,' and a 'worn-out tune.' On the 17th, Lee Yong-woo, a member of the Democratic Party's Emergency Committee, appeared on a radio broadcast and criticized, "During the Lee Myung-bak administration in 2008, the corporate tax rate was cut from 25% to 22%. As a result, retained earnings increased by 158%, and net income increased by 115%, but investment decreased by 0.2% over seven years. When a crisis deepens, the private sector does not invest. The logic that simply cutting corporate tax will increase investment does not hold."

However, considering the global trend of lowering corporate taxes, recent declines in domestic investment, and the side effects of raising corporate taxes, there is a considerable counterargument that excessive normalization of the corporate tax system is urgent. The controversy over corporate tax cuts is summarized as a 'fact check.'

① Is it really a tax cut for the wealthy? OECD average top corporate tax rate is 21.5%＝ According to the National Assembly Budget Office on the 17th, the top corporate tax rate among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD) is 21.5%. Most major countries have lowered corporate taxes, reducing the rate by 2.2 percentage points compared to 2011 (23.7%). Even if the government lowers the current top corporate tax rate of 25% to 22%, it would still be higher than the OECD average. Ultimately, this is not a tax cut for the wealthy but a normalization of corporate taxes that impose excessive burdens on companies compared to global competitors. The government also plans to simplify the four-tiered tax bracket system into two or three tiers. Among OECD member countries, only three, including Korea, apply progressive rates to corporate taxes with multiple tax brackets, and Korea is the only country with four tax brackets.

Immediate revenue loss from corporate tax cuts is inevitable. However, by expanding companies' investment capacity, a virtuous cycle of 'tax cuts → investment → growth → employment' can be established, thereby expanding the mid- to long-term tax revenue base. Some raise concerns about conflicts with the 'sound fiscal' policy, but the problem lies not in 'productive tax cuts' but in 'wasteful expenditure increases.' For example, government spending is expected to cost an average of 2.57 trillion won annually just for expanding the age eligibility for child allowances and providing 2 million won per newborn child, following last year's legislative amendments. If the top corporate tax rate is lowered to 20%, about half of the average annual revenue loss of 5.7 trillion won would be wasted on cash payments driven by political 'populism' (based on bills proposed by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho during his time as a lawmaker). What is needed is restraint on indiscriminate spending rather than productive tax cuts.

② 'MB Season 2'? Was there no trickle-down effect from corporate tax cuts?＝ The 'trickle-down effect' is also a subject of debate. Although the Lee Myung-bak administration lowered the corporate tax rate to 22%, corporate investment did not increase significantly, and retained earnings grew, leading to claims that there was no trickle-down effect. This is 'half true and half false.' The year 2008, when the Lee Myung-bak administration cut corporate taxes, was the year the global financial crisis struck. Due to the worldwide economic downturn and increased uncertainty, companies found it difficult to increase investment even if they held cash. Some interpret that the corporate tax cut at least served as a 'breakwater.'

On the contrary, statistics showing the adverse effects of raising corporate taxes are easy to find. According to a 2015 report by the Korea Institute of Public Finance, a 1 percentage point increase in corporate tax reduces Gross Domestic Product (GDP) by 0.21 percentage points in the first year and by 1.13 percentage points in the long term. According to the U.S. Congressional Budget Office, a 1 percentage point increase in corporate tax reduces employment by 0.3 to 0.5 percentage points and workers' wages by 0.3 to 0.6 percentage points.

③ Declining attractiveness of investment in Korea＝ Attention should be paid to the fact that domestic investment has decreased while overseas investment has increased in recent years. Foreign direct investment (FDI) in manufacturing, a 'pillar' of the domestic economy, decreased from 7.2 billion USD in 2017 to 5 billion USD in 2021. Meanwhile, Korea's overseas direct investment (ODI) in manufacturing increased from 8.9 billion USD to 18.2 billion USD during the same period. This is interpreted as a decline in domestic investment attractiveness due to the 2018 increase in the top corporate tax rate (from 22% to 25%) and strengthened corporate regulations under the Moon Jae-in administration, creating a challenging environment for businesses.

Deputy Prime Minister Choo emphasized, "By cutting taxes for companies, if companies actively invest and create jobs, it ultimately raises the country's growth potential and, based on that, expands the tax revenue base. From a broad perspective, tax reduction measures for companies are rather mechanisms that allow the overall economy and fiscal situation to enter a virtuous cycle."

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