South Korea Hikes Corporate Taxes, Boosts Hiring for Public Jobs

(Bloomberg) -- South Korea raised the income-tax rate for the nation’s highest-earning companies, as President Moon Jae-in seeks to fulfill his vows to fight inequality and create jobs.

The tax vote came just hours before the nation’s parliament passed a 428.8 trillion won ($390 billion) budget for 2018 just after midnight in Seoul on Wednesday. The budget is expected to raise revenue by nearly 8 percent to help fund spending on public-sector jobs and social welfare programs.

Lawmakers agreed to increase the income-tax rate on companies whose taxable income exceeds 300 billion won to 25 percent from 22 percent, the current top rate. The rate on individuals earning more than 500 million won will rise to 42 percent from 40 percent.

While those tax increases count as a modest victory for Moon in his budget battle with opposition parties, he had previously hoped to apply the new corporate rate at a lower income threshold of 200 billion won.

Raising corporate taxes runs counter to the global trend. Other countries, including Japan and the U.S., are moving to cut them, with American lawmakers set to slash the rate to 20 percent from 35 percent. 

Kang Seog-gu, the head of the Korea Chamber of Commerce and Industry’s corporate policy team, said it’s difficult to predict the economic impact of the higher corporate tax rate in the short term.

“Theoretically, it is a burden on companies, but it can have a positive impact on corporate activities over the longer term depending on how the government manages its spending to support consumption,” Kang said.

About 77 companies will be affected by the higher rate, with their collective annual tax burden rising by about 2.3 trillion won, according to Finance Ministry estimates.

Samsung Electronics paid the most corporate taxes in 2015, at 3.2 trillion won, followed by Hyundai Motor at 1.4 trillion won, according to a March report by the National Assembly Budget Office. The figures are 2015 estimates based on financial statements.

The total budget figure was largely in line with earlier plans and marks an increase of about 7 percent on the initial 2017 budget. 

Government Hiring

The budget also includes plans to hire around 9,500 more central government officials in 2018, smaller than the initial proposal for about 12,200. Moon was elected in May with promises to reduce inequality and to be a “jobs president,” including by increase the number of public employees by 174,000.

The opposition and ruling parties had struggled to reach agreement on the spending plan, especially over increasing the number of public officials and the corporate tax rate. This led to them failing to pass the budget by a deadline of Dec. 2.

Lawmakers from the Liberty Korea Party, the biggest conservative party, boycotted the votes. In a statement on its website, the party expressed disapproval of the government’s plan to hire more employees and to offer financial aid to small companies burdened by a minimum-wage increase. It also opposed the higher corporate tax rate.

©2017 Bloomberg L.P.