Corporate tax cut, 3.4% economic growth impact?
On the 5th, the second day of the National Assembly’s inspection of the Ministry of Strategy and Finance.
There is debate over the government’s tax reform plan to reduce the top corporate tax rate from 25% to 22% starting next year.
[강준현 / 더불어민주당 의원]
“Is there a specific estimate of how much business investment will be stimulated and how many jobs will be created if the top corporate tax rate is lowered?”
[추경호 / 경제부총리]
“So we quote reports from KDI and others because if we do it ourselves, there might be misunderstandings. According to the results of the KDI study, the maximum tax rate cut of 3%p is 0.6% in the short term, and around 3.4% in the medium to long term, having a growth effect and an increase in tax revenue.”
This is the KDI data that Deputy Premier Chu confidently quoted.
This is the report released by KDI on the first day of the national audit, the day before.
KDI Focus No. 117
The title of this report is ‘An evaluation of the reform of the corporate tax rate system and future policy tasks’.
Let’s take a closer look at what it is.
Corporate tax cut-> Increase stock dividend, everyone’s profit?
The conclusion of this report is simple.
If the corporate tax is reduced, companies will invest more as much as they saved their taxes, and if investment increases, employment will increase, which is the so-called ‘trickle down effect’.
A new logic has emerged here.
It links corporate earnings and stock dividends.
This is the structure of ‘Corporate tax cut -> corporate performance improvement -> shareholder dividend increase’.
As a result, it is emphasized that profits go to individuals who own stocks, and the national pension income also increases.
“The more dividend income and stock appreciation gains that are attributed to individuals and the national pension, as corporate performance improves in the medium to long term by lowering the top corporate tax rate, individual asset formation and people’s retirement are more reliably guaranteed. .”
And then he concludes:
“It is clear that the cut in corporate tax is not just for the rich, but for everyone in the medium to long term. the political process.”
Is that true?
Is self-replication based on economic growth projections?
Firstly, we looked at the basis of the KDI report for the forecast that the economy would grow by around 3.4% due to a 3 percentage point cut in the corporate tax rate.
“Hak-soo Kim (2017) found that after controlling to a certain level the influence of factors other than the top corporate tax rate, such as characteristics by industry and year, when the top corporate tax rate is reduced (increased) by 1% p , the number of investment and employed will increase by 0.46% in the short term, respectively. We present the result of the analysis of an increase of 0.13% (decrease).”
It is based on a paper written in 2017 by the author of the KDI report.
This is a 2017 thesis, ‘Proposal on the policy direction of the new government’s corporate tax rate’, contained in Volume 10 of the Korea Economic Forum.
“The results of the analysis on the impact of tax cuts on the corporate tax rate in Korea presented here are self-estimated by Kim Hak-soo (2015b), unpublished manuscript.”
Again, it is an explanation that the evidence was taken from a 2015 paper by the same author.
I was looking for a paper from 2015.
“An Analysis of the Economic Impact of Corporate Tax Rate Increases,” Unpublished manuscript This is a thesis that has not been officially recognized by the academic community.
Of course, I couldn’t find the original text either.
He wrote another thesis based on his thesis, which had not been published in academia, and based on that thesis, he argued in the KDI report that corporate tax cuts lead to economic growth.
The economic growth effect of the cut in corporate tax is ‘zero’ on average… . academic differences
It is difficult to say with certainty whether the cut in corporate tax will lead to real economic growth.
This is because there is still fierce debate about its effectiveness in the academic world.
Unlike reports such as KDI, which emphasize the positive effect, there are many papers that come to the opposite conclusion.
This paper was published in the European Economic Review last August.
European Economic Review August Issue
The title of this paper is ‘Do Corporate Tax Cuts Stimulate Economic Growth?’
We verified 42 papers analyzing the impact of corporate tax cuts and 441 cases in these papers.
The paper concludes that, on average, the effect of corporate tax cuts on economic growth is zero.
“Our finding is that the average impact of corporate tax cuts on growth is zero..”
This means that corporate tax cuts sometimes have a positive effect and sometimes have a negative effect, but on average they don’t.
It was analyzed that various factors such as research and development incentives and labor supply have a cascading effect.
Attention was also drawn to the fact that there were 2.7 to 3 times more papers emphasizing the positive effect by over-reporting the results while emphasizing the net function of the corporate tax cut than papers with negative arguments.
70% of dividend income belongs to the top 1%
Then, if we assume that dividends increase due to the effect of the cut in corporate tax as claimed in the KDI report, how much profit will the individual actually get?
This is the data presented by the National Tax Service to the Office of the Assembly Yoh Yong-jin of the Planning and Finance Committee of the National Assembly.
Provided by the office of members of the Planning and Finance Committee of the National Assembly
In 2020, 94.6% of dividend income went to the top 10% of stockholders.
Will we narrow the scope further?
The top 1% took 73.7% of dividend income.
Can we narrow it down a bit?
It accounted for half of the dividend income, or the top 0.1%.
This ratio has barely changed since 2016.
Even if the dividend increases, the profits will not return to all the people as KDI claims.
In addition, I would like to mention that the ratio of total dividends to total net income, that is, the average dividend payout ratio, has decreased by more than 4 percentage points, although the net income of the KOSPI listed companies has increased by 85% of its compared to the previous year as a result of the Korea Exchange survey.
Worries about government trumpet coming true?
Let’s go back to the head of state.
Choo Kyung-ho, Deputy Prime Minister of the Economy, referred to the KDI report, giving the impression that it was objective data on the impact of the corporate tax cut.
As you can see, the KDI report is full of gaps.
However, three months ago, the director appointed by the previous government resigned from KDI.
Director Hong Jang-pyo at the time expressed his resignation and said:
“If the Prime Minister believes that KDI and state-run research institutes should focus only on research that suits the government’s taste and become the government’s trumpeter, then he does sense to change the law with the consent of the people… research institutions must be respected.”
Two months after Hong’s resignation, Deputy Premier Chu visited KDI and said, “KDI and the government should work together to find other viable policy options.”
‘Government trumpeter’ and ‘Government team to discover policy alternatives’.
Where does KDI stand now?
