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Breakingviews - Seoul's contrarian tax hike makes for good start
December 8, 2017 / 4:12 AM / 10 days ago

Breakingviews - Seoul's contrarian tax hike makes for good start

TOKYO (Reuters Breakingviews) - South Korea’s corporate tax increase is a contrarian one. The consensus from Washington to Tokyo is that lower levies stimulate innovation and job growth. Yet President Moon Jae-in’s move to crank up taxes on the highest-earning companies makes eminent sense. Asia’s fourth-largest economy is so unbalanced, it needs socialist redistribution to transform its capitalism.

The logo of the Bank of Korea is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji

South Korea has the second-highest level of overall inequality among members of the Organization for Economic Cooperation and Development. This is mostly a result of a dominant handful of family-owned industrial groups, or chaebol; Samsung, for example, generates around a fifth of the country’s GDP. This group hogs capital and starves innovative startups. It also collectively holds down wage growth, suppressing consumption, which keeps the economy over-dependent on exports to undependable trading partners like China and the United States.

The $390 billion budget makes a down-payment on disrupting this. It includes a 16.4 percent hike to the minimum wage, the biggest adjustment since 2001. It adds about 9,500 public sector jobs and extends aid to small companies that need help covering the new wage mandate. It will be funded in part by hiking corporate taxes to 25 percent from 22 percent on companies with income exceeding $273 million per year. That will impact roughly 77 companies, including Samsung Electronics and Hyundai Motor. There is pushback, as expected: the Federation of Korean Industries is lobbying lawmakers to head off further changes.

But more needs to be done. Parts of this budget pander to the left-wing base, and will have little reform impact. Creating government jobs for underemployed youth, for example, makes for easy politics but won’t upgrade competitiveness. It’s going to be much harder to get the private sector to add staff. Moon still has a long reform checklist in hand: discouraging incestuous cross-shareholding structures; taxing excess corporate cash reserves better spent fattening paychecks; stepping up antitrust enforcement and lowering takeover defences to make industrial rationalisation easier. And so on. 

It’s grand that Moon’s “trickle-up economics” plan, standing in such stark contrast to U.S. President Donald Trump’s approach, has gotten underway. But leveling the playing field for 51 million Koreans and creating more grassroots growth will take a lot more work.

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