November 22, 2024

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Laffer Associates Founder and Chairman Arthur B. Laffer (Courtesy of Laffer Associates)

With the upcoming US presidential election scheduled for November, South Korea stands to benefit significantly if the new administration brings a change in economic policy, according to Arthur B. Laffer, founder and chairman of Laffer Associates.

"A return to pro-growth economic policies in the US is a prerequisite for widespread global economic growth, much as we saw during the Reagan era, where nations around the world cut tax rates after seeing US success," Laffer said during an email interview with The Korea Herald last week.

"I believe Korea, one of our most important trading partners and geopolitical allies with a tremendous amount of high-tech products and manufactured goods desired by the world, is poised to be one of the biggest beneficiaries of a return to US and global prosperity."

South Korean conglomerates have aggressively ramped up their investments by building plants and offices in the US, such as Hyundai Motor, which is preparing for its new manufacturing facility in Georgia while recently partnering with General Motors. Laffer emphasized that allies like South Korea have historically benefited from a robust US economy, enhancing both "trade" and "global security."

Since earlier this year, Laffer has been mentioned by a number of leading US media as one of the three candidates to take over as chair of the Federal Reserve System if former President Trump returns to power.

Laffer is famous for his concept of the Laffer Curve illustrates the relationship between tax rates and tax revenue, which suggests that there is a maximum tax rate beyond which government revenues fall.

In other words there are optimal rates that maximize government revenue without hindering economic activity. While Laffer popularized this idea, its origins can be traced back to the 14th-century economist Ibn Khaldun, who first discussed the concept in his work, The Muqaddimah.

Initially met with skepticism, this idea has become a key principle of the supply-side economics favored by conservatives, which seeks to promote growth by increasing the supply of goods and services. This approach supports tax cuts and limited government intervention to help businesses expand, in contrast to demand-side economics, which focuses on spending to stimulate growth.

Earlier in July, the South Korean government announced plans to reduce corporate and inheritance taxes for companies participating in a program aimed at addressing the chronic undervaluation of Korean stocks, known as the "Value Up" program. The plan will reduce taxes by 5 percent of the increase in shareholder returns, which include dividend payouts and stock buybacks, for participating firms.

Additionally, the government plans to eliminate an inheritance tax surcharge for stakes in large companies. The maximum rate of inheritance tax is 50 percent, but an extra 10 percentage points is charged on major shareholdings in the nation's largest companies. The proposal also includes the repeal of a capital gains tax scheduled to take effect next year.

Amidst high economic volatility, Laffer advises Korea to adopt tax policies that promote growth while carefully preplanning and managing government spending. He cautioned that the challenge lies in implementing tax cuts that stimulate economic activity without increasing fiscal deficits.

"Gradual and predictable tax increases can help avoid sudden shocks to the market. Sudden steep increases in taxes above consumers’ purchasing power can lead to unintended consequences, such as a surge in black market activity, or unexpected drop in the legal market that could negatively impact government revenue."

He cited examples of indirect taxes, such as those on tobacco and alcohol—often referred to as "sin taxes"—which can disproportionately affect lower-income individuals.

"These taxes (indirect taxes) are regressive, meaning they take up a larger percentage of income from those who earn less. Such can lead to financial strain for lower-income households, especially if the taxes are increased suddenly and significantly," he explained. "This was evident in Korea after tobacco taxes were sharply raised in 2015, leading to unexpetedly low tax revenues."

Laffer concluded that while "all taxes are bad," they are also "necessary."

"What you always want is to raise necessary revenues in the least damaging fashion possible. To do that, you want the lowest possible tax rates applied to the broadest possible tax base."

By Kim Hae-yeon (hykim@heraldcorp.com)