Corporate tax subsidy and investment

Corporate tax policy in Korea lacks, if doesn’t ignore, basic understanding of the nature of firms. In corporate finance theory, large firms are characterized by low investment opportunities and high cash flow and small firms are characterized by high investment opportunities and low cash flow. What is needed to foster investment and thus growth is then to tax large firms more to reduce over-investment cost and small firms less to reduce under-investment cost. If done reversely, the obvious consequence is an increase in cash reserve, perquisites, and tunneling through related-party transactions (in case of family firms), as large firms are short of investment opportunities to exploit. If the government forces them to increase investment, things will get worse. The tax subsidy to large firms will flow to increase their pies within industry, stifling small firms – which are primary sources of growth and employment in the economy – rather than increase the size of pies to share. Even so, the previous and current administrations have continued to cut (effective) tax rates more for large firms – which already have cash in hand but nowhere to invest – and now turn to blame the large firms for not making investment and lay the current economic distress to their charge. Is this a lie or a joke?

Leave a Reply

Your email address will not be published. Required fields are marked *