On the 16th of last month, the government announced the new economic policy direction. Many wondered what direction the new government's economic policy would take in the era of high inflation. One of the most controversial issues was the corporate tax rate cut. Corporate tax is a tax levied on the income of a corporation. Simply put, it is an income tax levied on a company.
However, according to the government announcement, the key is to lower the current top tax rate of 25% to 22%. The logic is that if the tax on companies that make a lot of money is reduced, the economy will be activated as a result with the creation of new jobs, which naturally increases the country's growth potential.
This is a classic trickle-down theoretical approach. It is argued that if economic support is provided to the wealthy and entrepreneurs, the overall economy can be improved by being more active, and the resulting benefits will also be passed on to the low-income classes.
However, the problem is that this trickle-down theory has never been proven effective in real life. Reducing the tax did not have a major effect on investment and employment, but rather increased the company's internal reserves. In 2015, the International Monetary Fund (IMF), the International Monetary Fund's IMF Strategic Policy Evaluation Bureau, released a report that analyzed the cases of more than 150 countries around the world and found that the so-called trickle-down effect is completely wrong logic.
Even Pope Francis has spoken on the trickle-down effect, saying: "In the past, there was a belief that when a glass is full, the profits will be shared with the poor, but now when the glass is full, the glass magically gets bigger, giving nothing to the poor." The Pope also points out in the Encyclical: "All Brothers", that neoliberalism repeatedly reproduces solutions to various social problems, relying on a magical trickle-down theory, but today’s problems of inequality are not solved in this way.
A Research Institute also came up with an analysis that estimated the decrease in tax revenue, which was about 1.7 trillion won as of the report in 2020. However, lowering the corporate tax rate is not just a reduction in tax revenue. In the end, the tax revenue reduced by the tax cuts for the rich can lead to someone else's tax increase, or the government's essential spending can be cut by that much. There is also concern that the various supports given to the socially vulnerable right now may be reduced.
In this sense, the economic policy direction of the new government should be reviewed again. I hope that we can support the socially and economically vulnerable with the tax from the profits of companies that earned more, so we can try to resolve the polarization that has become more severe due to COVID-19.
It seems that a policy that takes care of those who have the most difficulty with rising prices is needed first, rather than focusing on the corporate tax of large corporations that can survive on their own when the economy gets tough. When the new government establishes the economic policy direction, it is good to remember that the word 'economic' in Korean is 經濟 and the abbreviated phrase 經世濟民 means economics is the way to manage the world and save the people. This is important for all of us to remember.
