korean unification studies

There are no official details of the proposed unification tax. Indeed, in my belief, the whole concept is as much about sparking debate on unification as it is about financially preparing for unification. Nevertheless, there are questions that are starting to gain greater attention in the local press.

Firstly, how is the government going to collect the unification tax? There is suggestion that it may be in the form of an increased value added tax (VAT). Now of course VAT is universal, but is it fair? Inevitably, a VAT will impact those that can least afford it. It is well known that VAT can disproportionately raises the tax imposed on middle and low-income households.

Korea already has a VAT rate of 10%, with exemptions for merit goods (education, medical services, etc) and equity goods (public transportation, necessities, etc) and also a myriad of exemptions for business contributing to the economy. The current rate of 10% is significantly lower than the OECD average of around 17%, but any increase will be difficult in both terms of popularity and economically, given the inherent risk as the country exits the current stimulus stage.

Secondly, how will the revenue be controlled? Many Koreans are highly cynical when it comes to the government’s ability to maintain the revenue for the expressed purpose for which it was raised. There are examples of countries with good records, such as Norway’s handling of petroleum tax revenues and poor records, such as, well… take your pick. Korea’s record lies somewhere in the middle.

Cynicism regarding the unification tax is heightened by the timing. Why talk about a unification tax now, while inter-Korean relations are so poor? This leads many to think that the unification tax will be ‘just another tax’ to plug holes in the budget.

Thirdly, how will the unification tax be seen in North Korea? Well, by all indications, quite poorly.  True to form, the North has declared:

“The unification tax put forward by a traitor derived from delusions of an emergency in the North. The South will pay dearly for the reckless remarks born of rebellious motives”.

For all the talk, I think it is wise to remember what this really is. Whether intended or not, Lee Myung-Bak has stirred debate on unification. Lee has indicated that it is time to change Seoul’s policy toward Pyongyang. Seoul should no longer manage the division of the Korean peninsula but rather prepare for unification. Most Korea watchers will agree, it is definitely time for this debate to occur!

When all the smoke has cleared, one thing will be certain, by design or not, Lee Myung-Bak restarted the unification debate in South Korea – albeit from a different angle to his two immediate predecessors.