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Unification Tax Sure to Annoy North Korea

Kim So Yeol  |  2010-08-17 14:29
President Lees Liberation Day suggestion of a unification tax in preparation for the day the two Koreas are re-united continues to be a source of controversy, with some now looking at feasible funding methods while others fret over the likely North Korean response.

The South Korean government is allegedly considering using the unused capital from the Inter-Korean Cooperation Fund as the basis for unification funds. The Fund is currently worth approximately one trillion won. However, increasing VAT, the issuance of bonds or even a unification lottery is also being considered.

Unification is one issue which is the responsibility of all citizens, and it is being suggested in some quarters that VAT is an appropriate vehicle to reflect that. Usefully, South Korean VAT compared to that of OECD members is low; 17% on average across the OECD, but only 10% in South Korea. So any rise might not meet with an excess of anger from the South Korean people.

Germanys Solidarity Surcharge model is also being discussed. Instead of VAT, it is a tax levied over and above income and corporate tax. In 1991 it was imposed at 7.5%, dropping to 5.5% in 1997, where it remains.

Irrespective of its form, one positive evaluation of the unification tax holds that in a situation where North Koreas future is uncertain and the possibility of rapid change exists, any activity that can bring the issue of unification, which has long been under the surface, to the surface and have the positive effect of actualizing the discussion must be good.

However, quite apart from the need to sensitively publicize the unification tax, in political and academic circles they are considering the worrisome effect it may have on future inter-Korean relations given the likely response of North Korea.

Park Ji Won, the Democratic Party leader in the National Assembly, reacted negatively to President Lees announcement, pointing out, "The probability of its being interpreted as unification by absorption is high, and will aggravate North Korea." Even within the ruling Grand National Party, there is some dissent on the plan.

Experts also agree that trouble with North Korea is inevitable. The unification tax is predicated upon North Korean denuclearization and change in its system, they point out.

Professor Ahn Byung Jik, an honorary professor with Seoul National University, told The Daily NK, "Vision 3000: Denuclearization and Openness could be seen as an active proposal to induce change in North Korea, however, the unification tax, which represents preparation for an emergency, is highly likely to become a source of diplomatic trouble with North Korea regardless of its necessity."

Professor Oh Il Hwan of Hanyang University agreed, saying, "The unification tax is an issue which will annoy North Korea for sure, however, not making preparations for the future is also a problem."

"Preparation for unification should be made from the medium and long term perspective, Professor Oh added. The cost of unification is also an important issue which cannot be avoided."
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