Why South Korea is proposing a reunification tax

A reunification tax proposed Sunday by President Lee Myung-bak would help South Korea's economy recover from the more than $1 trillion cost of merging with economically-stunted North Korea.

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South Korean President Lee Myung-bak outlined a three-step reunification plan for North and South Korea and proposed a tax to support reunification in a speech Sunday.

The move comes as reunification seems more distant than ever: Tensions are running high and bilateral relations are at a new low in the wake of the sinking of the South Korean Navy ship, the Cheonan, on March 26, which killed 46 South Korean sailors. The South has blamed the sinking on a North Korean torpedo attack.

Mr. Lee made the proposal in a speech marking the anniversary of South Korea’s liberation from Japan in 1945. He warned the North against further provocation, and said the South would not tolerate such acts. In recent weeks the North has captured a South Korean fishing boat and launched artillery fire from its shore, some of which landed in South Korean waters. Last year, it conducted a test of a nuclear device and launched long-range missiles.

But Lee also said that “reunification will definitely come,” and outlined the process under which it could take place. The first step would be denuclearization of the North to form a “peace community,” then would come economic integration, and finally total unification.

South Korea’s Yonhap News Agency reports that it is the president’s first specific proposal on reunification of the peninsula since he took office. Lee has taken a harsher tone toward the North than his predecessor, and has demanded the erratic regime give up its nuclear program. He cut aid and financial exchanges with the North after it conducted a nuclear test and launched long-range missiles last year, and banned all aid to the North after the sinking of the Cheonan.

His speech comes on the heels of a slight change in policy Friday, when he allowed aid to be sent to the North for the first time since the Cheonan, The Christian Science Monitor reports. It was a small gesture, however: the shipment of aid is limited (a doctor and two drivers delivering antimalarial drugs) and will only be sent to the closest point in North Korea from Seoul.

But Lee did not take a soft tone toward the North in his speech: he called the sinking of the Cheonan an “unprovoked act” by the North while calling on Pyongyang to improve its ties with the South, reports the Associated Press.

A costly move for the South

It is estimated that merging the economically-stunted North with South Korea would cost the South Korean economy more than $1 trillion, and Lee proposed the nation begin to prepare for that cost. Yonhap reports that he asked experts to begin to consider how such a tax should be applied.

Reuters reports that reunification could increase taxes for South Koreans by 2 percentage points each year for 60 years. The North’s economy is just 3 percent of the size of the South’s.

The New York Times reports that the move, which comes amid uncertainty over the succession for the North’s leader Kim Jong Il, whose health is reportedly failing, will likely elicit an angry response from the North.

“North Korea will take a unification tax as the expression of a South Korean attempt to prepare for a sudden collapse of the North Korean government,” said Kim Yong-hyun, an analyst at Dongguk University in Seoul.

Yang Moo-jin, a researcher at the University of North Korean Studies in Seoul, said: “President Lee should have first reinstalled South-North exchanges and laid the groundwork for the mood for unification before proposing a unification tax.”