Balancing tax reform with growth: Conditions for a sustainable hike

Audio report: written by reporters, read by AI

Cho Won-Kyeong

The author is a professor at UNIST and the head of the Global Industry-University Cooperation Center.

A central initiative of the second Trump administration, unveiled in July, is a sweeping economic proposal known as the “One Big, Beautiful Bill Again” (OBBBA). The legislation outlines large-scale tax cuts and significant reductions in government spending.

Despite its ambitious framing, investment firm Lazard assessed the corporate tax cuts as unlikely to substantially boost U.S. economic growth. However, the firm projected a potential 4 percent increase in the S&P 500 index’s earnings yield as a result of the measures.

In contrast, Korea’s stock market delivered a sharp correction on the first trading day of this month, following a two-month rally that saw the Kospi gain more than 20 percent and approach an all-time high. Market participants attributed the downturn to the Lee Jae Myung administration’s new tax reform proposal for 2026, which investors say has dampened sentiment.

The government’s plan includes raising the corporate tax rate, expanding the scope of major shareholders subject to capital gains tax on stock transactions, increasing the securities transaction tax and imposing a higher-than-expected top rate for dividend income under separate taxation. Investors argue that these changes run counter to the administration’s earlier pledge to usher in a “Kospi 5000 era.”

Tax systems are foundational to national economies and must be approached with care, as populist or politically expedient tax policy often produces unintended side effects.

In 2023, amid a global semiconductor slump, Samsung Electronics and SK hynix both posted substantial operating losses. Consequently, neither company paid corporate income tax for the 2024 fiscal year. These two firms typically account for roughly 10 percent of Korea’s total corporate tax revenue.

Fortunately, SK hynix, now a global leader in memory semiconductors, recorded strong earnings in 2024 and 2025. This underscores the point that fluctuations in corporate tax revenue are more closely tied to business performance than to headline tax rates.

Economist Arthur Laffer, known for the Laffer Curve, argued that lower tax rates could actually increase revenue and support long-term supply growth. This theory influenced tax cuts under the Reagan administration, though critics have called for more empirical evidence, citing concerns over rising income inequality.

The broader question — whether a tax rate hike will reliably lead to higher revenue — requires thorough, data-driven analysis. For any tax reform to succeed, it must align with global standards, avoid discouraging work and enterprise and be transparent in its goals. That, ultimately, is the only “beautiful condition” under which a tax hike can be justified.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.