hankyoreh

President Yoon Suk-yeol and ex-British Prime Minister Liz Truss (AP/Yonhap)

By Jae Jeong-im, dean of Semyung University Graduate School of Journalism

Liz Truss went down in history as the shortest-serving prime minister in the history of the United Kingdom. But as recently as her inauguration in September, she was sharing her dreams of becoming a second Margaret Thatcher.

Known as the “Iron Lady,” Thatcher ushered in the neoliberal era with policies that centered on cutting taxes, deregulation, privatization and neutralizing unions. She argued that granting businesses maximum freedom would lead to rapid economic growth that would allow everyone to prosper.

Truss followed the Thatcher prescription when she announced her “mini-budget,” which centered on massive tax cuts. But she ended up facing a severe backlash for it.

At a time when the effects of the COVID-19 pandemic and inflation were wreaking havoc on ordinary people’s livelihoods and worsening inequality, this approach of cutting taxes for the wealthy was a prime example of failing to read the room. Financial markets were thrown into turmoil, viewing this as a signal that government debt would increase, and Truss ended up stepping down after just 49 days in office.

Her successor Rishi Sunak quickly changed course, indicating that he planned to collect more in taxes and increase livelihood support.

Back in the 1980s, then-US President Ronald Reagan kept pace with Thatcher in implementing neoliberal policies. Today, it’s a very different situation in the US, too.

Current President Joe Biden has gone to work instituting major tax hikes for the wealthy and increasing welfare for ordinary people. His actions have included legislating a minimum tax rate to prevent major businesses from exploiting tax havens to avoid paying corporate taxes.

The members of the European Union have also joined the tax hike push, imposing windfall taxes on energy-related businesses.

Still, Truss is not alone. We can find another example of an administration that sympathizes in defiance of the global trends — here in South Korea, land of BTS and “Squid Game.”

The Yoon Suk-yeol administration has come out with one measure after another to cut taxes for the rich. These include lowering corporate taxes for megabusinesses with annual profits of over 300 billion won (US$231 million) and deferring financial investment income taxes for individuals who earn upwards of 50 million won a year through stocks and bonds.

Other plans include lowering the comprehensive real estate tax for those with large housing and land holdings and allowing people to pay less in inheritance taxes when they inherit companies.

These tax cuts also reduce the amount of money the government has available to spend. To avoid going into debt, it would need to cut back on fiscal expenditures.

The administration has further signaled that it plans to cut the welfare budget money that goes mainly to poor and powerless people — including funding for public rental housing, regional base hospitals, jobs for senior citizens, support for young people, and elementary school care programs. This comes at a time when the severe wealth divide is already poised to grow.

The administration also echoes Truss in its rationale for slashing taxes. The argument is that cutting taxes for large corporations and the wealthy leads to more investment, which leads in turn to more jobs and benefits for all, including low-income brackets. This is known as the “trickle-down effect.”

At first glance, it may seem plausible, but it rarely works out this way in reality.

Under the Lee Myung-bak administration, the same logic was applied to introduce tens of trillions of won in tax cuts, but companies did not increase their investment; they merely padded their internal reserves. Those who know about these things understand that the reason the companies don’t invest is not that they can’t find ventures with clear profitability potential, or that they don’t have the money.

Declaring that “trickle-down economics has never worked,” Biden stressed, “It’s time to grow the economy from the bottom and the middle out.”

The sort of economy that he describes, with a focus on low-income earners and the middle class, can be explained as a “fountain effect”: As incomes rise for those populations, consumption is revived, which drives increased investments that boost the economy.

Lower incomes are associated with a higher marginal propensity to consume, which means that any additional money earned is immediately spent. That means that raising such people’s real income through increased welfare and wages is a shortcut to boosting an economy. South Korea’s administration is heading in the opposite direction from Biden’s policies.

In the book “The Triumph of Injustice,” University of California, Berkeley professors Emmanuel Saez and Gabriel Zucman explain that the level of inequality in a country is influenced by taxes, and that it is democracy that decides the taxation system. In other words, the question of how much certain people are asked to pay in taxes — and how much inequality grows or shrinks as a result — depends on what kind of democracy it is.

The COVID-19 pandemic has only added to the gap between large and smaller businesses, between those with and without assets. The fact that tax cuts for the wealthy are being pursued at such a time reads as a signal that our democracy is no longer working.

With its parliamentary system, the UK was able to quickly change course and bring in a new prime minister. What should South Korea do?

To change course at this juncture, we need a concerted effort by the opposition, which still holds a majority in the National Assembly. We need the administration and ruling party to come to their senses, and we need active involvement by civil society.

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