Nov 13, 2008

Radical Liberals Rule

Radical Liberals Rule
By Sean Hayes (Korea Times on 11/14/2008)

The Lee Myung-bak administration's bold ``747 Vision'' of achieving 7 percent growth over 10 years, a per capita GDP of $40,000 by 2017 and turning Korea into the seventh largest economy in the world has been stymied by vocal interest groups with often radically liberal ideologies.

The President's highly anticipated reforms have nearly universally been moderated or abandoned so the President will avoid further conflict with these interest groups. The only losers in this battle are the Korean people.

A good example of the effectiveness of the actions of these interest groups is the recent tax law proposals by the administration. The measures, if approved, are to come into effect on Jan. 1, 2009.

The proposals include a modest reduction in the corporate tax rate. The corporate tax rate for companies with a tax base of over 200 million won will be reduced, under the proposal, by 3 percentage points, in fiscal year 2009, to 22 percent exclusive of the 10 percent resident surtax.

The rate is still notably high compared to other Asian economies such as Hong Kong, Malaysia, Thailand, and Singapore and on an effective rate basis will still be higher than most nations of the world. Before the proposed deduction Korea had the sixth highest effective corporate tax rate amongst the wealthiest 79 nations in the world.

The reduction in tax rate, coupled with other modest changes, will only drop the effective tax rate by percentages that will have little effect on Korea's global competitiveness.

The modest reduction is welcomed by companies presently in Korea, but will have only a marginal effect on encouraging additional investment in Korea and will encourage few companies in Korea, because of the only modest tax savings, to further invest in Korea.

The proposals also include a token reduction in personal income tax rates. For tax payers earning more than 88 million won, which includes the largest percentage of individuals that invest in the Korean stock market and who own and invest in small and medium business, the rate will be reduced, in the proposal, by one percent to 34 percent and the foreign worker flat tax will be reduced by two percent to 15 percent.

Such a modest reduction will have little influence in encouraging more investment and will motivate few foreign company employees to choose Korea over more taxpayer friendly Asian locales such as Hong Kong and Singapore.

The proposals also include an extension of the tax loss carry-forward period from five to 10 years, measures to reduce the tax burden on foreign individuals and corporations including an exclusion, in some cases, of most foreign source income for foreign workers, a 5 percent reduction in the interest and dividend withholdings paid by Korean companies to foreign companies or non-residents and the possibility of excluding a higher percentage of R&D expenditures from taxes.

The proposals, as a whole, are steps in the right direction, but until the Korean people allow the radically liberal to have a voice only equal to their numbers we will never see the real reforms needed to move Korea down the path to further economic, social, and political development.

If the President and his advisors had their way we would most likely see a drastic cut in corporate and personal income tax rates which would lead, according to the vast majority of the world's economists including Christina and David Romer, professor of economics at the University of California at Berkeley, to ``very large and persistent positive output effects.'' Studies, nearly universally, show that lower taxes will increase growth and tax revenues.

Hopefully, Korea can settle the difficulties with this vocal minority by standing behind the President and allowing him to lead the nation down the path towards his ``747 Vision.''

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SeanHayes@ipglegal.com