Sejong Digest 2.0 - Issue 17 (July 24 - August 09, 2017)

Moon Administration Unveils New Tax Hike Plan

Andrew Jung

On August 2, 2017, South Korea’s government announced plans to increase the tax rates on corporations and high-income earners starting next year. The government estimates that tax revenues will be around 5.5 trillion won ($4.9 billion) annually and will be used for job creation and welfare. The tax hike is part of President Moon Jae-in’s fiscal policy focused on income and consumption-led growth

For people with income over 500 million won ($445,700), the tax rate will be increased from 40% to 42%. People in the income bracket of 300-500 million won will be taxed at 40 %. The income tax hike will affect about 93,000 people. The Moon administration also plans to create a tax bracket forcorporations, in which companies exceeding 200 billion won will be taxed at 25% while those earning less than 200 billion won will be taxed at 22 percent. Tax benefits would be expanded for low-income households and for both small and medium-sized businesses. Tax exemptions would also be given to businesses that hire more people and tax deductions for those who convert contractors into regular employment or increase salaries. 

If implemented, 129 companies are thought to be affected by the increase in tax rates, especially Samsung Electronics and Hyundai Motors. The tax hike represents a shift from past conservative administrations under Lee Myung-bak and Park Geun-hye that focused on tax cuts to boost the economy. It is the first time in five years that South Korea raised the maximum income tax rate and the last corporate tax hike was in 1990. The new policy is based on President Moon’s belief in “income-led growth” that emphasizes increasing household incomes and spending to strengthen economic growth. The Moon administration also wanted to reverse past policies, seeing them as increasing the income gap and believes that tax rates should increase on the wealthy and corporations to finance his job growth and social welfare expansion plans. 

The tax hike plan is also seen as a way to finance Moon’s 5-year economic planon job creation and social welfare that can cost around 178 trillion won over the next five years. The economic plan was released on July 25th, 2017 and emphasized labor-friendly growth, such as increasing the minimum wage, unemployment benefits, reduce its long working hours, and instill more transparency among chaebols. 

Experts warned about potential drawbacks of the tax hike plan, saying that not enough tax revenues may be collected for the economic plan. The corporate tax hike can lead the companies to move abroad for lower taxes, decreasing both economic activity and corporate tax revenues, leading to fewer jobs. Professor Hong Ki-Yong of Incheon National University said the tax hike can also hurt smaller companies and that the South Korean government can fail to reach its tax revenue target. The government can also be pushed to increase taxes for lower income earners by, for example, adjusting the value-added tax.

Responses to North Korea's Ballistic Missile Test

Leon Whyte

On July 28th, North Korea tested an intercontinental ballistic missile (ICBM) that experts believe has the range to hit major U.S. cities on the West Coast, as well as Denver and Chicago potentially. This is the second ICBM test North Korea has tested, both within weeks of each other.

The U.S. response to North Korea’s  second ICBM test has been mixed. For example, U.S. Senator Lindsey Graham suggested a military option to “destroy North Korea’s nuclear program and North Korea itself,” while Secretary of State Rex Tillerson has emphasized that the U.S. is not seeking regime change but rather dialogue. However, any military option is complicated by the fact that North Korea could launch road-mobile ICBMs at a variety of launching points, making it difficult for the U.S. to effectively target and destroy North Korea’s ICBM capability.

South Korea’s response to the missile test has been to increase pressure against North Korea and to request permission from the U.S. to increase its own missile capabilities. For example, the day after North Korea’s most recent ICBM test, South Korean President Moon Jae-in asked the U.S. to temporarily deploy the full THAAD anti-ballistic missile system, which had previously been under environmental review and had drawn protests from China. In addition, President Moon requested negotiations with the U.S., which have been accepted, to modify the terms of an 1970s agreement that limited South Korean missile capabilities.

China has condemned North Korea’s ICBM test, but has also called for all sides to reduce tensions. Furthermore, China has reacted strongly to U.S. President Donald Trump’s blaming of China for North Korea’s nuclear and missile programs. Chinese Foreign Ministry spokesman Geng Shuang rejected blame, saying “China responsibility theory on the peninsula nuclear issue can stop,” and claimed that “Asking others to do work, but doing nothing themselves is not O.K." 

China Opposes Additional Deployment of THAAD in South Korea

Jessie Chen

North Korea’s second Inter-Continental Ballistic Missile (ICBM) test triggered South Korean President Moon Jae-in to reverse his decision to halt the U.S.’s advanced missile defense system known as Terminal High Altitude Area Defense (THAAD). The re-deployment of THAAD is expected to further sour China-South Korea relations.

After President Moon Jae-in took office in May 2017, he promptly delayed the deployment of THAAD in light of China throwing its economic weight behind its opposition against the U.S. missile defense system and domestic concerns about the environmental impact of installing such a system. However, North Korea’s aggressive behavior, as well as domestic political pressure to uphold the alliance with the U.S., forced him to reverse his decision. The government announced that the U.S. will deploy four more THAAD anti-missile defense launchers before the investigation into THAAD’s environmental impact is completed.

The Chinese Foreign Ministry spokesman Geng Shuang expressed serious concerns and opposition to the deployment of THAAD. He also claimed that the additional deployment of THAAD is a wrong decision that will not be able to resolve the North Korean problem but only to complicate it. China further called off a three-party meeting planned next month in Tokyo, which was already delayed once since July. China increased pressure on South Korea by placing restrictions on Korean businesses operating in China. China is expected to take more retaliatory actions against Moon’s decision to allow additional deployment of THAAD launchers.

U.S. Bans Travel to North Korea

Patrick Niceforo

Effective Friday, September 1, 2017, American citizens will not be allowed to travel into or through North Korea due to concerns regarding long-term detainment in the country. The Department of State previously issued travel warnings against North Korea earlier this year in February and May for similar reasons. Some U.S. nationals may continue to travel to North Korea if they meet the criteria for special validation. The travel ban will expire in a yearunless extended or revoked by the Secretary of State. Australia and Canadasimilarly advise against travel to North Korea given the missile testing and lack of consular capabilities.

The Trump administration issued the travel ban following the death of AmericanOtto Warmbier earlier this summer, who was medically evacuated from North Korea after he slipped into a coma. Currently, three Americans and one Canadian are still detained in North Korea and are accused of various crimes such as espionage and anti-state religious acts. Although many individuals have been freed from North Korea, it is common for the accused to be given sentences lasting anywhere from a decade to life.

Given that the United States and North Korea lack diplomatic relations, the United States cannot directly offer consular assistance to any American citizens detained in North Korea. The travel ban was met with criticism in North Korea, who called it “a dirty scheme aimed at limiting human exchanges.” North Korea has previously responded to international criticism by claiming its legitimate right as a sovereign state to detain those who break the law within its borders.

The travel ban may serve to further aggravate relations between the United States and North Korea. Recently, the Trump administration discussed apreventive war with North Korea and reinstating North Korea as a state sponsor of terrorism. Furthermore, the travel ban is inconsistent with President Moon Jae-in’s hope for continued contact and exchanges between the two Koreas. Banning travel to North Korea may prevent future detainments, but it also raises regional tension, the latter of which is risky given the increasingly fragile security situation in the Korean peninsula.

This Week in History: The First Sino-Japanese War

On August 1, 1894, China and Japan officially declared war on each other for control of Korea. Korea was then a tributary state of China, and Japan was interested in Korea’s strategic position and its natural resources. Tensions have been simmering between China and Japan as Japan was supporting the pro-modernization faction in Korea, while China supported the conservative monarchy. At that time, Japan had successfully modernized both as a nation and militarily after the 1868 Meiji Restoration. China under the Qing Dynasty, in contrast, had failed to modernize and lost two Opium Wars to Western powers. During the war, Japan took several victories with its modernized military first capturing Pyongyang and defeating China’s navy in the Battle of the Yalu River. Japan seized several cities in China, and its army was approaching Beijing forcing the Qing Dynasty to opt for peace. On April 17, 1895 the war endedwith the Treaty of Shimonoseki, having China recognize the independence of Korea.