🚨 Corporate Tax Increase Debate
Today Korean Economic News for Beginners | 2025.11.01
0️⃣ 1%p Rate Increase Reduces Employment by 0.019%p, Growth vs Tax Revenue Dilemma
📌 1%p Corporate Tax Cut Increases Employment Growth by 0.019%p, Korea's Rate Higher Than OECD Average
💬 The Korean Association of Public Finance analyzed 43 years of data from 1981 to 2023 and found that reducing the corporate tax rate by 1 percentage point increases employment growth by about 0.019 percentage points. Researchers discovered that when production increases by 1%, labor demand rises by 1.121%, concluding that corporate tax cuts promote business investment and production, leading to job creation. Currently, Korea's maximum corporate tax rate stands at 26%, exceeding the OECD average of 23.1%, raising concerns that the government's push for rate increases will negatively impact business vitality and job creation. However, the government argues that securing tax revenue to invest in future industries like AI and expand welfare spending will build a foundation for long-term growth.
1️⃣ Easy Explanation
Corporate tax is a tax on the profits that companies earn. When the tax rate goes up, companies have to pay more in taxes, leaving them with less money to invest or hire people. On the other hand, when the tax rate goes down, companies can use more money for business expansion and hiring.
Let's use a simple example to understand how corporate tax works. Suppose Company A made a profit of 10 billion won in one year. If the corporate tax rate is 25%, they pay 2.5 billion won in taxes and keep 7.5 billion won. If the rate increases to 26%, they must pay 2.6 billion won in taxes, leaving only 7.4 billion won.
At first glance, 100 million won might seem like a small difference, but this money could be used by the company to build a new factory, do research and development, or hire more employees. Especially for small and medium-sized companies or startups, a 100 million won difference could determine their survival.
The Korean Association of Public Finance's research proved this relationship with numbers by analyzing 43 years of data. The result showed that lowering the corporate tax rate by 1 percentage point increases employment growth by 0.019 percentage points. Nationwide, this could mean tens of thousands of jobs.
The more important finding is the relationship between production and employment. The fact that a 1% increase in production leads to a 1.121% increase in labor demand means that when the economy grows, jobs grow even faster. This is evidence that the positive cycle of corporate tax cuts → increased business investment → expanded production → increased employment actually works.
But why does the government want to raise corporate taxes? The biggest reason is lack of tax revenue. In recent years, as the economy slowed down and corporate performance worsened, corporate tax revenue dropped significantly. The government sees corporate tax increases as a way to secure revenue when welfare spending is rising but tax income is insufficient.
Also, the government argues that "if we increase tax revenue and invest in future industries like artificial intelligence (AI) and semiconductors, it will help economic growth in the long run." The logic is that while the corporate burden increases in the short term, if the government nurtures strategic industries, the entire economy will benefit eventually.
However, opponents argue that "direct investment by companies is more efficient than government intervention." Companies know the market better and invest in profitable areas, making resource allocation more rational. Also, there are concerns that with Korea's corporate tax rate already higher than the OECD average, raising it further would disadvantage global company recruitment and accelerate domestic companies' overseas relocations.
Ultimately, this issue is a choice between 'short-term tax revenue securing' and 'long-term growth momentum.'
2️⃣ Economic Terms
📕 Corporate Tax Rate
The corporate tax rate is the percentage of tax imposed on the net profits that companies earn.
- Korea applies tax rates of 10-26% depending on the taxable income bracket, with a maximum rate of 26% for income exceeding 300 billion won.
- The higher the tax rate, the lower the company's after-tax net profit, reducing their capacity for investment and employment.
- The OECD average corporate tax rate is about 23.1%, and Korea is on the higher end.
📕 Employment Elasticity
Employment elasticity is an indicator that shows how sensitively employment responds when production or economic growth changes.
- Research results showed that when production increases by 1%, labor demand increases by 1.121%.
- Employment elasticity greater than 1 means economic growth is very effective in creating jobs.
- This is a key concept explaining the path through which increased production from corporate tax cuts leads to employment growth.
📕 Taxable Income
Taxable income is the amount of income or profit used as the basis for calculating taxes.
- Corporate tax applies different tax rates to various taxable income brackets.
- For example, 10% for up to 200 million won, 20% for 200 million to 20 billion won, 22% for 20 billion to 300 billion won, and 26% for over 300 billion won.
- Due to this progressive structure, larger corporations bear higher effective tax rates.
📕 Tax Competition
Tax competition is the phenomenon where governments lower tax rates to attract foreign companies and prevent domestic companies from leaving.
- As globalization progresses, companies relocate their headquarters or choose investment locations in countries with lower tax rates.
- The continuous decrease in average corporate tax rates among OECD countries is also due to this competition.
- If Korea raises its tax rate, it could become less competitive and disadvantaged in attracting investment.
3️⃣ Principles and Economic Outlook
✅ Relationship Between Corporate Tax and Employment
Let's examine in detail how corporate tax rates affect employment and the mechanisms involved.
First, corporate tax cuts increase companies' investment capacity. When the money that needs to be paid in taxes decreases, companies have more money they can use freely. This money can be spent on new facility investments, research and development, and overseas market development. Manufacturing companies especially need huge amounts of capital for automation equipment and new technology introduction, and when the corporate tax burden decreases, these investments become more active. When investment increases, production capacity expands, which means more workers are needed.
Second, for small and medium-sized enterprises (SMEs) and startups, this is a matter of survival. Large corporations can withstand increased tax burdens with sufficient financial resources, but SMEs and startups cannot. They need to reinvest a significant portion of their profits to grow, and when corporate taxes increase, their reinvestment capacity decreases, slowing growth. In reality, many startups operate at a loss for the first few years before turning profitable, and if the corporate tax burden is high at that point, it becomes difficult to grow to the next stage. SMEs and startups are the main creators of new jobs, so if their growth is blocked, job creation will also slow down.
Third, in the global competitive environment, corporate tax rates are a key factor in attracting investment. Multinational companies consider corporate tax rates seriously when deciding where to build new factories or research centers. For example, Samsung Electronics' decision to build a semiconductor factory in Texas, USA, was significantly influenced by the U.S. government's tax incentives. If Korea's corporate tax rate continues to rise, even domestic companies may increase overseas investment while reducing domestic investment. This directly leads to a decrease in domestic jobs.
Corporate tax cuts have the effect of increasing jobs through the path of investment expansion → production increase → job creation.
✅ International Comparison of Korea's Corporate Tax Rate
Let's compare Korea's corporate tax rate with other countries to analyze competitiveness.
First, corporate tax rates in OECD countries have been continuously decreasing. In the early 2000s, the OECD average corporate tax rate exceeded 30%, but it has now dropped to 23.1%. The U.S. drastically cut its rate from 35% to 21% during the Trump administration, and the UK lowered it to 19% to attract companies. Ireland succeeded in attracting European headquarters of global companies like Google and Apple with its ultra-low rate of 12.5%. In this trend, Korea's maintenance of a high rate of 26% is disadvantageous in terms of international competitiveness.
Second, Korea's tax rate is high even compared to Asian competitors. Singapore applies 17%, Hong Kong 16.5%, and Taiwan 20%. These countries positioned themselves as Asian financial hubs or manufacturing bases using low tax rates as weapons. China is at 25% but applies a preferential rate of 15% to high-tech companies and strategic industries, making it effectively lower than Korea. Vietnam attracts foreign investment actively at 20%. One reason Korean companies relocate factories to Vietnam or China is this tax rate difference.
Third, high tax rates negatively impact attracting foreign direct investment (FDI). When global companies establish bases in Asia, they often choose Singapore or Hong Kong over Korea. Of course, tax rates aren't the only deciding factor, but they are certainly an important consideration. The slowdown in Korea's FDI growth rate in recent years is not unrelated to this. Foreign companies must come in for technology transfer and job creation effects, but high corporate tax rates are blocking this.
International comparisons show that Korea's corporate tax rate has already reached its competitiveness limit, and arguments for lowering rather than raising it gain credibility.
✅ Tax Revenue Securing vs Growth Momentum
Let's examine the 'tax revenue securing' vs 'growth momentum' debate surrounding corporate tax increases in a balanced way.
First, the government's lack of tax revenue is a real problem. Corporate tax revenue has dropped significantly in recent years. Corporate tax revenue, which was 86 trillion won in 2022, decreased to 69 trillion won in 2023, a drop of 17 trillion won. This resulted from deteriorating corporate performance due to an economic slowdown. Meanwhile, welfare spending continues to increase, and defense spending is also rising, creating serious fiscal pressure. From the government's perspective, there is urgency to secure revenue even by raising corporate tax rates.
Second, however, there's no guarantee that raising tax rates will lead to increased revenue. According to the so-called 'Laffer Curve' theory, raising tax rates beyond a certain level can actually reduce revenue. When tax rates become too high, companies evade taxes, relocate overseas, or simply scale down their businesses. With Korea's corporate tax rate already high at 26%, there are concerns that raising it further may not increase actual revenue but only reduce business vitality. In fact, there have been cases in some countries where significantly raising corporate taxes actually reduced revenue.
Third, in the long term, economic growth is the fundamental solution for securing tax revenue. Raising the rate by 1 percentage point might collect a few trillion won more in immediate revenue, but if this dampens business investment and lowers economic growth rates, revenue will decrease in the long term. Conversely, lowering corporate taxes to increase business vitality and grow the economy can increase total revenue despite lower rates because the tax base grows. When the U.S. lowered corporate taxes from 35% to 21% in 2017, revenue decreased in the short term, but total revenue increased again as the economy recovered.
To achieve both goals of tax revenue securing and growth momentum simultaneously, expanding the tax base and improving collection efficiency may be more effective than adjusting tax rates.
4️⃣ In Conclusion
The corporate tax increase debate is an important crossroads that determines the future direction of Korea's economy, beyond simple tax policy. As the Korean Association of Public Finance research shows, corporate tax rates and employment have a clear correlation, and rate increases are likely to negatively impact business investment and job creation.
Currently, Korea's maximum corporate tax rate of 26% exceeds the OECD average and is already in a disadvantageous position in the global tax competition environment. As Asian competitors attract companies with low tax rates, if Korea raises rates further, it could lead to domestic companies relocating overseas and reduced foreign investment.
Of course, the government's need to secure tax revenue cannot be ignored. A stable fiscal foundation is needed for welfare spending and future industry investment. However, there's no guarantee that corporate tax increases will lead to increased revenue, and there's a risk that they could reduce economic vitality and decrease revenue in the long term.
A more desirable approach is tax revenue expansion through economic growth rather than rate increases. If we lower corporate taxes or at least maintain current levels while creating an environment where companies want to invest, the economy grows and revenue naturally increases. Also, improving tax equity and preventing tax evasion to broaden the tax base could be more effective than raising rates.
As the Korean Association of Public Finance research empirically demonstrated through 43 years of data, the positive cycle of corporate tax cuts → increased investment → expanded production → job creation actually works. The finding that 1% production increase leads to 1.121% employment increase clearly shows that growth means jobs.
Ultimately, corporate tax policy should be decided within the big picture of long-term growth and job creation, not the short-sighted goal of short-term revenue securing. When companies lose vitality, jobs disappear, and revenue eventually decreases too. Growth-friendly tax administration is the way that benefits the government, companies, and citizens alike.
View Table of Contents