Out of Control Policy Blog

South Korea Gets It

While most economies are trying to spend their way to daylight, one country gets it: South Korea. Tax-News.com reports that South Korea will cut income taxes, corporation taxes, and increase capital gains tax concessions in an effort to boost their ailing economy.

South Korea's income tax system will have an across-the-board tax reduction of 2% in 2009. The South Korean tax system currently levies between 8% and 35% income tax on earnings. The top bracket begins at KRW88m. Under the new system, which will be fully introduced by 2010, the range will be reduced to between 6% and 33%...

Capital gains tax allowances, which previously allowed citizens who have owned a home for twenty years or more to reduce capital gains payments by 80%, will now be extended to those who have only owned their home for ten years.

The minimum corporate tax rate, which is currently levied at 13% on companies with profits of less than KRW100m, will be reduced to 11% on profits up to KRW200m in 2009. Companies earning in excess of KRW200m will be charged at the upper corporation tax rate of 22% in 2009, down from 25%. The upper and lower rates will fall further to 10% and 20% respectively by 2011.

All told the plan will amount to $19 billion USD in tax cuts over a five year period. "We must decisively reform unreasonable taxes that put pressure on the people and the economy," Finance Minister Kang Man Soo said in a statement. "We will use the reform of tax policies to provide momentum for job creation and economic recovery."

Shin Dong Suk, an economist at Samsung Securities in Seoul, says, "The government's proposal for tax cuts will help the economy in the longer term by lessening the tax burden. But it'll take time for these measures to restore consumer confidence and boost consumption and investment."

According to the International Herald Tribute, the tax plan will expand breaks for parents who spend money on their childrens' education and on family medical care.

There are some questionable parts of the new finance plan. There government has proposed a KRW20 trillion fund to recapitalize the South Korean financial sector and boost lending and thus consumer consumption. And IHT says the government will also provide tax incentives to companies to prompt more research and development with the aim of lifting such investments to five percent of gross domestic product by 2012. Tax incentives can sometimes be dangerous and wasteful, but other times effective. By and large, though the tax cut plan is the best world government response to the down turn yet.

Anthony Randazzo is Director of Economic Research


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