Economic Analysis - Revised Tax Bill Could Undermine Business Environment - OCT 2017

BMI View: South Korea ' s proposed tax bill is unlikely to be able to raise enough revenues to cover President Moon Jae-in ' s planned economic development programmes, presenting downside risks to Korea ' s long-term fiscal position. Furthermore, reductions in tax breaks for R&D spending could be negative for investment, while the raising of taxes could dampen the attractiveness of South Korea ' s business environment. However, we believe that the contents of the bill are likely to undergo changes amid stiff objection from the pro-business opposition parties.

South Korean President Moon Jae-in's proposed tax revision bill aims to redistribute wealth and provide support for the working class while creating jobs. However, the projected tax revenue (KRW5.5trn annually) collection amount is insufficient to cover Moon's 100 new policy projects to be carried out over the next five years. This presents downside risks to our forecasts for Korea's long-term fiscal deficit to remain fairly modest, averaging 0.8% of GDP over the next decade. Moreover, the government's plans to reduce tax breaks on R&D and investment spending could have longer term repercussions on South Korea's efforts to move up the value chain and shift towards Industry 4.0. The raising of corporate taxes, increasing capital gains taxes, and taxes to promote corporate investment could also weigh on South Korea's business environment, leading to reduced domestic investment. However, Moon and his ruling Minjoo Party of Korea (Minjoo) lack the majority in parliament required to pass the bill. As such, we believe that the revisions are unlikely to be passed in their current form amid stiff objection from the pro-business opposition Liberty Party of Korea (LPK).

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