Vogel: South Korean Comparison

Jan 24, 2017

During the first three days of the Korean War, Seoul, South Korea was overrun and devastated. Today it’s a beautiful, thriving city with modern office towers, a world class subway system and a twenty-first century airport. But, just like the United States, South Korea is experiencing the loss of manufacturing jobs – a problem that South Koreans blame on technology and cheap labor from Indonesia.

In order to compete globally, companies like Hyundai have invested heavily in technology and now South Korea has the highest ratio of robots to workers in the world.

But in South Korea there’s a tradition of lifetime employment, so for them, the loss of manufacturing jobs has been especially challenging – and their first response was overly simplistic. The unions and the government pressured big companies like Samsung to provide five years of salaries to workers who were laid off.

Now that retirement package has dwindled to 28 months as South Korea struggles to find a better way to deal with a changing world. They’re experimenting with outplacement services, job training and financial incentives to companies, and it will be interesting to see which, if any of these experiments works best.   

Rental housing in Seoul utilizes a system called Jeonse which is unique in all the world. Instead of paying monthly rent, tenants deposit a large sum of money equal to at least 50% of the value of the apartment. Landlords are permitted to invest this deposit and earn interest during the term of the lease which is usually two years.

I can’t imagine such a system working here, in part because, unlike the South Koreans, most Americans are not great savers. I also can’t imagine tenants trusting their landlords with hundreds of thousands of dollars even if they have a legal contract saying it will be returned.

However, when I probed more deeply, I discovered that the real incentive behind this Jeonse system is taxes. Landlords in South Korea must pay taxes at a 40% rate on rental and other business income, but only a 16% rate on their income from investing the deposit.

It’s likely we’ll soon be reforming the tax code in the U.S. and making some significant changes.

I doubt we’ll end up with anything like the Jeonse system, but it’s a good reminder that changing the tax code can have unpredictable, even surprising, outcomes.