"If Corporate Tax Rate Drops by 3.3%p, GDP Grows by 1.4% Annually Over 10 Years"

Hankyung Research Institute 'Evaluation and Economic Effects of the 2022 Tax Reform Proposal' Report

[Asia Economy Reporter Park Sunmi] It has been claimed that the 2022 tax reform plan's core measure of corporate tax reduction will have positive effects on the private sector, businesses, and the national economy, with the gross domestic product (GDP) expected to grow at an average annual rate of 1.4% over 10 years.

On the 11th, the Korea Economic Research Institute (KERI) released a report titled "Evaluation and Economic Effects of the 2022 Tax Reform Plan," expressing a positive assessment that the reform is expected to enhance the dynamism of the private sector, businesses, and markets. In particular, the report praised the adjustment of the tax system, including the reduction of the corporate tax rate, the adjustment of double taxation on dividends from overseas subsidiaries, and the termination of the investment-win-win cooperation promotion tax system, as desirable measures aligned with global standards to improve corporate competitiveness.

Estimating the economic cost of the core measure of this tax reform plan, the 'corporate tax reduction,' it is projected that a 3.3 percentage point decrease in the corporate tax rate will reduce the user cost of capital by 3.89% and increase total investment by KRW 49.0537 trillion. As a result, GDP is expected to grow by 2.1% in 2023 and maintain an average annual growth rate of 1.4% over 10 years (2023?2032), while household labor income is also analyzed to increase by KRW 620,000 to 800,000 annually.

Cho Kyung-yeop, head of the Economic Research Department at KERI, explained, "A reduction in the corporate tax rate will affect the overall economy through the pathway of 'lower user cost of capital → increased investment → increased capital stock → increased labor productivity → higher growth rate,'" adding, "This corporate tax reduction is expected to have positive effects on the private sector, businesses, and the national economy."

However, KERI pointed out that while the overall direction of the revision is desirable, improvements are still needed in areas such as research and development (R&D) tax support, corporate succession, and the premium valuation of major shareholders, which remain discriminatory against large corporations.

First, regarding R&D tax support for large corporations, the current tax reform plan only increased the facility investment tax credit by 2 percentage points for national strategic technologies, but did not include improvements to the tax credit for research and personnel development expenses, which had been reduced over time. Second, there is no change in the policy direction for the current inheritance tax system related to corporate succession, which supports only small and medium-sized enterprises, meaning that significant costs are still expected for succession in large corporations.

Lim Dong-won, a research fellow at KERI, argued, "Tax support related to R&D, especially the expanded R&D tax support for large corporations that had been reduced, should be increased and shifted to a principle of permissive support to encourage corporate growth through research and development and investment." He added, "Regarding corporate succession, in the short term, the tax burden on succession should be eased by lowering inheritance tax rates and abolishing the premium valuation of major shareholders, and in the long term, the introduction of capital gains tax is necessary."

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