The South Korean fishing boat Daeseung and its crew members returned home earlier this month after a month-long detention in North Korea. Shortly after, South and North Korea began to discuss Seoul’s rice aid for the North and the resumption of the reunions of separated families between the two Koreas. The series of positive developments are apparently bringing changes to inter-Korean relations, which had been more frigid than ever before. President Lee Myung-bak called for the adoption of a “unification tax” in his speech marking the 65th anniversary of Korea’s liberation from Japanese colonial rule last month, saying that unification will happen anyway and it’s time to think about real and substantial ways to prepare for it. The president’s Liberation Day speech was regarded as the government’s future policy guideline, and Lee’s proposal drew a lot of attention from the public. What exactly is the “unification tax” and why was the proposal made at this particular time? Here’s Cho Bong-hyun from the Industrial Bank of Korea Economic Research Institute to explain.

A “unification tax” will provide potential funds to be spent in merging South and North Korea into one society. It is sort of an investment needed for coping with the heavy cost of unifying the two Koreas, between which there is a wide social and economic disparity. The tax includes not only funds to be spent after unification but also those needed in the process of uniting the two Koreas—achieving economic integration, for example. It is fairly reasonable to prepare for the huge unification costs in advance in order to minimize the side effects of a sudden unification and even generate a synergy effect after unification. Previous inter-Korean relations were mainly focused on bilateral cooperation and exchanges. But it’s time to look ahead into the future unification of Korea. Even now, it is not too late to manage inter-Korean ties in light of this so South Korea can reduce the burden of uniting the two Koreas and gain public consensus on unification. I think now is an appropriate time to discuss this matter.

North Korea blasted Lee’s unification tax proposal, calling it a declaration of a full-scale political confrontation premised on an emergency situation in North Korea. Meanwhile, the political community in South Korea was divided in opinions. The ruling Grand National Party said that it was time to consider initiating a unification tax and that it would prepare for the new tax on a party level by organizing a task force or holding a public hearing. On the other hand, the opposition camp, including the Democratic Party, clearly expressed objection to the proposal, since it could be misinterpreted as an attempt to push for unification by absorption, thereby provoking North Korea. Controversy is also rampant about the assessment of unification costs. Estimates of the cost of Korea’s unification vary among local research institutions, but most institutions estimate it would amount to roughly 2,000 trillion won or 1.7 trillion dollars.

Unification costs vary, depending on who calculates them and when unification occurs. The Stanford University Asia-Pacific Research Center in the U.S., for example, estimates the unification cost will be 2 trillion dollars, while the U.S.-based Rand Corporation projected 1.7 trillion dollars. The Korea Institute of Public Finance calculates that the cost will be about 106 billion dollars, or 12 percent of South Korea’s gross domestic product. The Presidential Council for Future & Vision predicts that Korea will have to spend 2.14 trillion dollars through 2040 for unification costs. But the government agency assesses that the cost will be reduced to 260 billion dollars if unification is realized after North Korea’s gradual openness, not after a sudden collapse of the communist regime.

Attention is also being paid to how the government will collect the new tax. One option is to increase the value-added tax, which is an indirect tax. This method will be more helpful for reducing the resistance from the public than to introduce or hike direct taxes, such as the income tax and the corporation tax. What is more, Korea has considerable scope to raise its value-added tax rate, which is well below the average 17 percent for the Organization for Economic Cooperation and Development. The government is also considering reviving the defense tax, which was abolished in December of 1990, issuing bonds or a new lottery, and linking the existing Inter-Korean Cooperation Fund with the new unification tax. Mr. Cho is putting more weight on the indirect tax.

Creating a new direct tax and imposing it on people may draw a public backlash. I think it will be more appropriate to collect the unification tax in the form of an indirect tax, which is usually earmarked for national projects. In the wake of the global financial crisis, many countries around the world have been introducing indirect taxes, such as a “carbon tax.” In light of this trend, I think an indirect tax is the most reasonable way of colleting the new unification tax in Korea. It will also lessen the resistance from tax payers.

Amid the sizzling controversy over the proposed unification tax, experts are studying Germany’s unification. After unification, Germany allowed the surcharge of 5.5 percentage points on the income tax, and the nation has collected some 250 billion dollars of taxes for the past 20 years. But the actual unification costs, including funding for local provinces, amounted to 2 trillion Euros, or 2.5 trillion dollars. However, the situation hasn’t improved as quickly as expected, with the income level in the Eastern German region remaining at just 70 percent of that of the Western German region. Germany watchers predict the nation will continue spending money in order to reduce the gap. Citing the German example, Mr. Cho stresses that South Korea needs to prepare for unification with long-term, well-thought-out plans.

Although Germany had been preparing for unification for 10 years, it still had to spend an astronomical amount of money after unification. If Germany’s unification is any guide, a huge unification cost is anticipated for Korea. It’s absolutely necessary to prepare for that in advance. The proposal of adopting a unification tax will entail extensive discussions. It’s most important to build a social consensus on this issue. Unification involves North Korea, too, of course. So, it’s necessary to come up with proper alternatives that North Korea can understand. After all, the problem is how to secure funds. The government needs to collect the huge amount of funds in phases over the coming years.

The nation has only now started to discuss the unification tax proposal. Korean people should engage in constructive discussions, focused on pragmatic ways to prepare for unification and reduce the unification costs.



[Interview] Chuseok Party for N. Korean New Settlers A group of North Korean defectors is enjoying cheerful songs, clapping their hands. A special event took place at the Yangcheon Culture Center, western Seoul, on September 17 ahead of the Korean Thanksgiving holiday of Chuseok, one of the biggest traditional holidays. There, the Yangcheong District Office and a North Korean defectors’ group held a Chuseok party for newcomers from North Korea to comfort the lonely expatriates who are not allowed to visit their North Korean hometowns and to share a warm relationship with one another. Here’s Heo Young-il, chief of the Association of North Korean Defectors Preparing for Unification, which organized this heartwarming event.

A group of North Korean defectors is enjoying cheerful songs, clapping their hands. A special event took place at the Yangcheon Culture Center, western Seoul, on September 17 ahead of the Korean Thanksgiving holiday of Chuseok, one of the biggest traditional holidays. There, the Yangcheong District Office and a North Korean defectors’ group held a Chuseok party for newcomers from North Korea to comfort the lonely expatriates who are not allowed to visit their North Korean hometowns and to share a warm relationship with one another. Here’s Heo Young-il, chief of the Association of North Korean Defectors Preparing for Unification, which organized this heartwarming event.

On that day, some 200 North Koreans performed an ancestral rite on an altar called Mangbaedan inside the Imjin Pavilion, located near the inter-Korean border. With traditional Chuseok dishes set on the altar, they made deep bows in the direction of North Korea where their parents live. Upon seeing the memorial table, they found themselves deeply missing their family members they had left behind in North Korea. This is how they eased their homesickness, though only in a limited way. North Korean land seemed so close on the clear autumn day, and the expatriates recall the memories of Chuseok, the richest and best season of the year, in their hometowns. A defector shares her story.

South Koreans set the table at home to conduct a memorial service for their ancestors. North Korean people, on the other hand, cook all the dishes at home, take them to the ancestors’ tombs and hold a rite there. Although celebratory events are not as diverse as they are in South Korea, North Koreans, too, hold commemorative events on traditional holidays, such as a sports meeting. My daughters were good athletes, and the whole family used to cheer for them and had a delightful time on the field days.

After the joint memorial service, the defectors gathered in the Yangcheon Culture Center to enjoy the party. In a rare occasion, a radiant smile lit their faces with joy as they watched the wonderful performances of the Pyongyang Art Troupe and joined a talent show as well as a prize lottery.

...We’re truly thankful to the district office for throwing such a nice party for us. Actually, we had nowhere to go during Chuseok holidays. I was very happy to sing together and share delicious food with my fellow North Koreans.

...We’re enjoying this meaningful gathering on the occasion of Chuseok. Even though we are not allowed to meet our family members in North Korea, we, defectors, are brothers and sisters to one another. It feels like I just met my own parents and brothers in my hometown.


The newcomers shared warmth with one another during the Chuseok party, which was a great consolation. The unfortunate North Koreans can’t meet their loved ones on traditional holidays, as much as they miss them. We should consider their sufferings and ponder on the true meaning of Chuseok, in which the more we share, the richer we become.