🚨 Corporate Tax Increase Review: Companies Face Double Burden from Rising Electricity Bills and Labor Costs

Today Korean Economic News | 2025.07.24

📌 Government Reviews 25% Corporate Tax Rate Plan…"Concerns About Reduced Business Investment and Manufacturing Decline"

💬 The government is reviewing a tax reform plan to raise the top corporate tax rate from the current 24% to 25%. The Ministry of Economy and Finance said, "We are reviewing various options to secure tax revenue and strengthen income redistribution." However, companies are fighting back, saying that with cost burdens already significantly increased due to rising electricity bills and minimum wage increases, additional tax burdens would greatly reduce their investment capacity. The manufacturing industry, which is already struggling with poor exports and low-price competition from Chinese companies, strongly expressed concerns, saying "We have no choice but to consider overseas relocation instead of domestic investment."

1️⃣ Easy to Understand

The government is trying to collect more taxes from companies by raising corporate tax rates. But companies are strongly opposing this because they are already struggling with various cost burdens.

'Corporate tax' is the tax that companies pay on their profits. For example, if a company made 10 billion won in profit in one year, it currently has to pay 2.4 billion won in taxes at a 24% rate. If the rate goes up to 25%, it would have to pay 2.5 billion won, which is 100 million won more.

The problem is the situation companies are facing now. First, electricity bills have risen significantly. Manufacturing companies need a lot of electricity to run their factories, and when electricity bills go up, production costs increase accordingly. Also, the minimum wage keeps rising, so labor cost burdens are also growing.

On top of this, the export environment is not good. Chinese companies are attacking the market with low prices, weakening Korean companies' competitiveness. In this situation, if corporate taxes also rise, companies' burdens will become even heavier.

What companies are worried about is reduced investment capacity. If they have to pay more taxes, they will have less money to spend on developing new technologies or investing in facilities. Some companies are even considering reducing domestic investment and moving their factories overseas.

From the government's perspective, the purpose is to increase tax revenue to secure funds for welfare and public projects. But given the strong opposition from companies, a careful approach seems necessary.

In the end, finding the right balance between collecting more taxes and maintaining corporate vitality has become an important challenge.

2️⃣ Economic Terms

📕 Corporate Tax

Corporate tax is the tax imposed on income earned by companies (corporations).

• Korea's current top corporate tax rate is 24%, applied to income brackets exceeding 300 billion won.
• Corporate tax is an important part of national tax revenue, amounting to about 80 trillion won annually.
• There's a dilemma where higher rates increase government income but reduce companies' investment capacity.

📕 Tax Base

Tax base refers to the income amount on which taxes are actually imposed.

• It's the net profit remaining after deducting necessary expenses and losses from a company's total revenue.
• Different tax rates apply according to tax base brackets in a progressive tax structure.
• Current rates are: 20% for 20 billion won or less, 22% for 20-300 billion won, 24% for over 300 billion won.

📕 Manufacturing Hollowing Out

Manufacturing hollowing out is when domestic manufacturing declines and its share of the economy decreases.

• It occurs when companies move their production bases overseas due to high costs, regulations, and labor shortages.
• Manufacturing hollowing out leads to problems like job losses, technology outflow, and weakened economic foundations.
• Korea currently maintains a manufacturing share of about 28%, but continuous management is needed.

📕 Tax Revenue

Tax revenue is the total amount of income the government collects through taxes.

• National tax revenue in 2024 is about 350 trillion won, serving as the core source of government budget.
• It consists of various taxes including income tax, corporate tax, value-added tax, and comprehensive real estate tax.
• It has economic cyclicality - increasing when the economy is good and decreasing when it's bad.

3️⃣ Principles and Economic Outlook

✅ Background and Government Position on Corporate Tax Increase

• Let's examine the background and logic behind the government's consideration of corporate tax increases.

  • First, the need to secure tax revenue is the main driving force behind considering corporate tax increases. The government faces continuously growing fiscal demands due to increased welfare spending, infrastructure investment, and expanded defense spending, making additional tax revenue necessary. Particularly, with pension and medical expenses rapidly increasing due to population aging, securing long-term fiscal soundness is urgent. A 1 percentage point increase in corporate tax could secure about 8 trillion won in additional annual tax revenue, making it an attractive option for the government. The government also argues that expanding the tax base is necessary to manage the national debt (about 1,100 trillion won) that increased during COVID-19 response.

  • Second, the logic of strengthening income redistribution and improving social equity supports this policy. The government argues that "the social responsibility of large corporations and high-income groups should be strengthened." In reality, the top corporate tax rate applies to large corporations with tax bases exceeding 300 billion won, representing less than 0.1% of all corporations. The logic is that even if these large corporations bear additional taxes, there would be no direct impact on small and medium enterprises. They also argue that considering the top personal income tax rate is 45%, a 25% corporate tax rate is still reasonable.

  • Third, there are considerations for international tax harmonization and preventing tax avoidance. The government's position is that with the OECD average corporate tax rate at about 23%, and compared to major countries like the US (21%), Germany (30%), and France (25%), 25% is an appropriate level. Particularly, with the introduction of a global minimum tax rate of 15% making tax avoidance difficult, they believe maintaining an appropriate tax rate is necessary to stabilize the tax base. However, this logic has limitations as each country's economic conditions and business environments differ.

• The government's consideration of corporate tax increases is based on fiscal needs and equity logic, but careful judgment considering economic reality and corporate competitiveness is necessary.

✅ Increased Corporate Burden and Investment Contraction Concerns

• Let's analyze the current cost burden increases companies face and the additional impact corporate tax increases would have.

  • First, electricity bill increases are putting serious cost pressure on manufacturing companies. The electricity rate realization policy implemented from 2024 increased industrial electricity rates by an average of 13.1%. For power-intensive industries like steel, chemicals, and semiconductors, annual electricity cost burdens increased by billions of won. Particularly, small and medium manufacturing companies are experiencing significantly deteriorated profitability as they find it difficult to pass on electricity rate increases to product prices. If corporate taxes are also increased on top of this, the management burden on already struggling companies will inevitably increase.

  • Second, rising labor costs and increased regulatory compliance costs are weakening corporate competitiveness. The minimum wage has risen by more than 35% over the past five years, and new regulations like the 52-hour work week and the Serious Accidents Punishment Act have significantly increased companies' compliance costs. According to a survey by the Korea Federation of SMEs, companies perceive regulatory costs as increasing by more than 7% annually on average. In this situation, additional corporate tax increases are raising concerns that they could be the 'last straw' for companies.

  • Third, there are concerns about long-term competitiveness weakening due to reduced investment capacity. According to research by the German Institute for Economic Research (DIW), a 1 percentage point increase in corporate tax rates reduces corporate investment by 2.5%. This effect is even greater during economic downturns. With Korean companies' R&D investment growth rate already slowing, corporate tax increases are likely to further contract innovation investment. This raises concerns that short-term tax revenue increases could damage long-term growth engines.

• With companies' cost burdens already approaching limits, additional corporate tax increases are likely to negatively impact investment and employment, requiring a careful approach.

✅ Manufacturing Hollowing Out and Overseas Relocation Risks

• Let's examine the impact corporate tax increases would have on the manufacturing ecosystem and the risk of industrial hollowing out.

  • First, there's a risk that manufacturing overseas relocation already in progress could accelerate. Recently, more Korean companies are relocating production bases to China, Vietnam, India, and other countries. The main reasons are deteriorating domestic business conditions including rising labor costs, strengthened regulations, and high rental fees. If corporate taxes are also increased, even more companies are expected to consider overseas relocation. Particularly, China is lowering corporate tax rates to as low as 15% to attract high-tech companies, potentially widening the gap with Korea.

  • Second, the entire industrial ecosystem could be at risk due to accompanying relocation of small and medium parts suppliers. When large corporations relocate overseas, their partner companies have no choice but to follow. This phenomenon is already appearing in major industries like automotive, shipbuilding, and chemicals. Manufacturing hollowing out leads to the disappearance of quality jobs, technology outflow, and weakened industrial foundations. Particularly, since Korea is a manufacturing-centered economy with manufacturing accounting for 28% of GDP, the ripple effects could be very significant.

  • Third, there are concerns about Korea's weakened position in the global supply chain reorganization process. With global supply chains being reorganized due to US-China conflicts and COVID-19, countries are competing fiercely to attract manufacturing. The US is providing large-scale subsidies through the Inflation Reduction Act (IRA), and Japan is expanding corporate tax reduction benefits. If only Korea raises corporate taxes in this situation, it could become disadvantageous in international competition. This raises concerns that policies aimed at increasing tax revenue could actually risk shrinking the tax base itself.

• To prevent manufacturing hollowing out and maintain industrial competitiveness, it's time to focus more on improving the business environment and supporting innovation rather than raising tax rates.

4️⃣ In Conclusion

The government's consideration of corporate tax increases stems from legitimate purposes of increasing fiscal demand and the need for income redistribution, but given the difficult situation companies currently face, a careful approach is necessary.

Companies are already under considerable cost pressure from electricity bill increases, minimum wage rises, and various regulatory strengthening. With export difficulties and low-price competition from Chinese companies added to this, the business environment has significantly deteriorated. If corporate taxes are also increased at this time, companies' investment capacity is likely to decrease further.

What's particularly concerning is the acceleration of manufacturing hollowing out. With many companies already considering overseas relocation, if tax burdens also increase, such movements could accelerate further. Since manufacturing is a core pillar of the Korean economy, weakening this sector could seriously damage the entire economy.

Of course, the government's fiscal needs cannot be ignored. With fiscal demand continuously growing due to increased welfare spending, infrastructure investment, and COVID-19 response, securing additional tax revenue is a necessary task. However, corporate competitiveness should not be sacrificed for this purpose.

Alternative approaches are needed. Rather than raising corporate taxes, we should consider expanding the tax base through improving the business environment. Helping companies make more profits through deregulation, electricity rate stabilization, and expanded innovation support could be a way to secure more tax revenue in the long run.

Ultimately, finding a balance between securing tax revenue and maintaining corporate competitiveness is important. A policy direction that focuses more on building long-term growth foundations rather than short-term tax revenue increases is needed at this time.