Seoul's contrarian tax hike makes for good start


By William Pesek

(The author is a Reuters Breakingviews columnist.)

TOKYO, Dec 8 (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 $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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- In sessions on Dec. 5 and 6, South Korean lawmakers voted to raised the minimum wage to 7,530 won($6.88) per hour, a 16.4 percent boost. President Moon Jae-in aims for 10,000 won by the end of his term in 2022.

- Along with raising corporate levies to 25 percent from 22 percent, the government hiked taxes on individuals taking home more than $455,000 to 42 percent from 40 percent. Policy tweaks in the 2018 budget could raise government revenue by almost 8 percent.

- The Federation of Korean Industries criticized the hike, claiming that going against international tax trends will "decrease Korean companies' global competitiveness" and "hinder investment and thus job creation."

- William Pesek is a Tokyo-based journalist, former columnist for Barron's and Bloomberg and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

This article appears in: Stocks , World Markets , Politics

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