Ever since President Park Geun Hye
announced her “Reunification is a jackpot” policy, our society has stopped viewing reunification as an issue
of national sentiment or community spirit, and has instead started seeing it as
a means for gaining economic benefit.
The divide between the North and the South
has gone on for so long that the younger generations have not had the chance to
come into contact with anyone in or from North Korea. As such, the economics of
reunification, rather than national sentiment, have become a bigger issue.
Educated about reunification from a young age, there are not many youth in our
country that agree about taking on reunification expenses as a necessity. In
fact, many are against it. As per the KBS adult survey taken in 2012, there is
a definite difference of opinion between them and the older generation. So, how
did the younger generation become so anxious about reunification expenses? What
do we have to do to prepare for the future?
Let’s take a look
at an example of a country that reunified before us: Germany. Despite West
Germany’s reputation as a great economic power, it did
not prepare funds for reunification before the fact. Instead, it covered the
expenses and supported East Germany financially with tolls, special visa fees
for visiting East Germany, fees to clear away environmental waste, etc.
East Germany suddenly collapsed, and
because West Germany had no choice but to follow the absorption reunification
route, it faced many difficulties raising enough money to cover the exorbitant
costs. Also, after reunification, East and West Germany integrated their labor
markets, currency, and social welfare. As such, the reunification expense was
much more than previously imagined and a Reunification Solidarity Tax was
established.
As Germany fell deeper into debt, it
implemented indirect taxes and added extra levies on every taxation sector. In
the end, it was the people in the low income tax bracket that suffered the
most. There was resistance against reunification tax collection and controversy
surrounded the whole issue.
Like Germany, reunification is our goal,
but we have not been sufficiently saving up for it. Moreover, we are
financially worse off than West Germany was right before reunification. Due to
North Korea’s instability, there is a good chance that
reunification can occur for us the same way it did for Germany: sudden
absorption with limited government funding to support it.
Of course, compared to the expense of
reunification, the benefits we gain, such as a decreased threat to national
security, a bigger labor force, etc. are much more valuable. Also, we can cover
a part of the reunification expenses with investment trusts on North Korean
real estate, privatizing state-owned assets, and issuing government bonds.
However, there is no doubt that we will have to be the ones that bear most of
the burden for the reunification expenses. A more detailed explanation follows.
According to many reports, the North Korean
people have the most to gain from reunification. Following economic
development, there will be a great improvement in their standard of living, and
they will have greater political freedom. Development in the North will promote
job growth and protection of private property. In the long term, when North and
South Korean society fully integrate, they will receive better medical
treatment as well.
However, an astronomical sum will be needed
to develop the North so that it is similarly developed to the South. On top of
that, the South Korean economy will need to provide living expenses for an
additional 25 million people. There is a high possibility that the economy will
falter.
Because of North Korea’s instability, sudden reunification is a possibility. As such,
preparing reunification funds is a necessary and safe measure for our country.
However, funds for North and South Korean cooperation and other such things
that we are in the midst of preparing for are on a much smaller scale and will
realistically be used here and there to improve North-South relations and
trade.
Recently the Finance Committee announced
that following reunification they will issue bonds after establishing business
banks and subsidiaries of policy financial institutions instead of integrating
currencies with the North right away as a means of covering about half of the
expense. The committee estimates the reunification expenses to be 550 trillion
KRW, which means that there is a high possibility that the South Korean
citizens would be expected to cover the remaining half through a reunification
tax.
It is not easy even now to acquire tax
revenue, and the country’s finances are tumbling from
bad to worse. On top of all that, if a reunification tax is implemented, we may
experience an economic recession of 20 years, among other difficulties,
just like Germany did during its reunification.
Right now South Korea has a low birth rate
as well as an aging population which means that the number of people is
steadily decreasing. The middle class has collapsed, leading to extreme social
polarization. The young have a hard time finding jobs as the elderly continue
to work in order to save enough for retirement and living expenses, creating
conflict between generations.
By 2036, it will take 1.96 workers to
support one retired person. For comparison’s sake, in
Japan it will take 1.53 workers to support one retired person. This means that
it is the current youth that will have to provide more support than any other
generation has before them. In this situation, if a long-term reunification tax
is implemented, it will only burden the youth more and create even more unrest
and conflict between the older and younger generations.
In 2013, Seoul University’s National Interests Research Group did a survey about Korean
citizens’ feelings about reunification expenses. 44.3%
of those surveyed said that they would not pay for reunification expenses. This
means that, realistically speaking, the biggest obstacle for reunification is
its cost.
Just as there is a big difference between
how those over 50 years of age and how those under 30 think of reunification,
there is a big difference about how they think about its costs. Therefore, the
question of whether the youth think of reunification the same way as their
parents do, or the same way as the people of the generation just above theirs
do will become an important topic of political discussion when they become
eligible to vote.
Hana High School’s
Economics of Reunification Research Committee surveyed the youth populace to
see how they felt about reunification expenses. They concluded that the more
one knows about reunification, the more one is ready to acknowledge the
importance of preparing for expenses incurred by reunification.
What’s interesting
is that despite being a survey about reunification, only 21% of the
participants said that they would be okay with a reunification tax.
Reunification expenses rank dead last in priority for our government, which
chooses welfare as its top priority to allocate spending. This implies that
just as the older generation, the youth are also worried about population
ageing and income polarization. This means that the costs of welfare are our
first priority.
The thing is, though, that we cannot
control when reunification will occur. We cannot predict it, and therefore when
it suddenly happens, the question remains whether we will be financially ready
for it. Is it acceptable for us to continue procrastinating on raising the
required funds?
If we are not prepared, like Germany, our
financial burden will increase exponentially. Also, even if we continue on with
our welfare system the way it is now, by around 2050 the government’s expenditure on welfare will have doubled. So, even if we changed
our tax system right now, would we not be able to prepare what is necessary for
the future?
Germany implemented the “Reunification Solidarity Tax” in the early
years of reunification [1991-1997], which increased income tax and corporate
tax by 7.5%. The tax has been at an extra 5.5% from 1998 and will continue
until 2019. Social insurance fees were also raised.
In order to integrate North Koreans into
our society, health insurance as well as other social insurances must be
provided, and therefore, a raise in social insurance fees will be unavoidable.
Also, in order to spread the extra expenses evenly throughout the population
and to increase tax collection efficiency, it is worth considering adding extra
taxes to commodities and services.
However, because a tax hike could
negatively affect spending and cause the wealthy to escape overseas, it is
important that reunification funds be expanded while the negative side effects
of such policies are minimized. Four methods that meet these conditions
follow.
One: reunification tax can be established
as a temporary earmarked tax. This is similar to how Germany established its “Reunification Solidarity Tax”, but instead
of just limiting it to income and corporate tax, we can instate it as a
national and household tax at a fixed tax rate, just like the defense tax of
December 1990. And we can keep it on temporarily until the nation’s finances have stabilized following reunification.
The scale on which reunification tax will
be collected will change depending on the manner of reunification, the time at
which it occurs, and North Korea’s financial situation.
The income goals for each person in the North Korean region will change with
time, and the tax rate should be adjusted to reflect whether or not they
achieve these goals. It is reasonable to adjust the scale of reunification tax
collection based on the level of the North Korean region’s economic development.
Two: raising the tax rate on capital
income. Compared to the OECD countries’ average, our
country’s property tax is high, while income and
corporate tax is relatively low. However, income tax cannot be what we solely
focus on. When people consider the fact that they will have to pay more taxes,
they have less desire to work and the decreased amount of disposable income
means less consumer spending.
Capital income is unearned income, and as
such, it does not affect the majority of Korean citizens. Raising taxes on
capital income is entirely justifiable and can even help with income
redistribution.
There are a lot more advantages to taxing
capital income versus earned income, and if one examines Thomas Piketty’s theory about how economic polarization worsens, one can see that
it is better to increase taxes on capital income to cover reunification costs.
Right now our country’s interest income tax [15.4%] is
about half of that of developed countries; Moreover, we only tax at a rate of
0.3% per stock trade transaction.
Three: changing the system completely from
taxing income to taxing expenditures is a groundbreaking idea also worth
consideration. If we raise taxes on capital income, the wealthy would change
their nationality or find other unpredictable loopholes, and increasing the
taxation on interest income would cause the rate of savings to drop.
Therefore, we should try making
expenditures on short-term consumption rather than short-term income our tax
base. In other words, rather than paying taxes based on how much one earns, let’s try paying taxes based on the commodities or services we purchase.
That way, those that scrimp and save to become wealthy need not pay as much in
taxes.
On the opposite end of the spectrum, those
that borrow money and spend it freely would have to pay more in taxes. We are
dead last among the OECD countries for rate of savings per household, but this
policy would help and also make collecting taxes more convenient. The people
that live more luxuriously would have to pay more in taxes, which makes this a
pretty fair and just policy as well.
Dubai, for example, does not have corporate
or income tax, but only has a fixed tax on expenditures on commodities and
services. This is considered Dubai’s secret for
becoming the center of–not the Middle East but–Europe’s financial economy. After reunification, our country could also
defend against resistance against taxation, increase the rate of savings, and
comparatively easily procure reunification funds.
Four: increase corporate taxes on companies
inside North Korea. Since 2000, our savings among South Korean families have
decreased but companies’ savings have steadily
increased. This is because the companies that have earned a lot through exports
have not put that money back into the economy by providing jobs or investing
domestically.
Therefore, even the president has been
strongly encouraging investing, and there have been calls to increase the
corporate tax rate as well. The problem is that if the corporate tax rate
increases, companies will lose their competitive power. Furthermore, it is not
as though companies in the South will gain anything by helping North Korea
develop, so taxing them for that purpose would be unjust.
In fact, companies might transfer their
main offices overseas if that were the case. Therefore, after reunification,
instead of raising corporate taxes across the board, it would be better to just
tax those companies that want to establish themselves in the North Korean
region, a so-called “North Korean Region Special Development
Tax”. In turn, industrial complexes, roads, ports, etc.
can be constructed in the North Korean region with the money raised by those
taxes.
If future foreign companies located in the
North Korean region were taxed as well, companies in the South would not have
to pay exorbitant taxes and only the people that stand to gain from the taxes
would be taxed.
People say that our economy will be in
danger as reunification comes closer and closer to becoming a reality.
We have no reason to be like ostriches and
hide our heads in the ground to avoid any potential disasters. Measures to
cover the cost of reunification as well as a taxation system after
reunification must be prepared, and these need to be measures that the South
Korean citizens agree to as well. The youth themselves are taking interest and
offering solutions–take it as encouragement and hope for the future.
*Views expressed in Commentaries are not
necessarily those of Daily NK.
