Posts Tagged ‘Taxation’

North Korea and taxation: some possible causes

Friday, March 18th, 2016

By Benjamin Katzeff Silberstein

As this blog noted yesterday, South Korean daily Joongang Ilbo claims that the North Korean government may formally reintroduce a tax system before May this year, when a Worker’s Party convention will be held.

The goal, according to Joongang’s source, is primarily to formalize the private economy further. The latest UNSC sanctions are forcing the government to seek out more sources of revenue, and the growing private economy is seen as a resource that can still be tapped further.

Moreover, the source says, the state is planning to expand trading permits for private merchants, both on the formal markets and in private business in general. Under the new system, the state would essentially let merchants get access to land, water and electricity in exchange for a fee, much like in other countries where the state holds a monopoly on goods that often fall into the category of natural monopolies.

This is all interesting for several reasons. First, since the notion of North Korea as a tax free society might appear puzzling to some, it is worth taking a look at why the government decided to abolish taxes in the first place.

Ironically, had Joongang waited a few weeks before publishing the news, they would have hit the 42nd anniversary of the decision to make North Korea formally tax free. For it was on March 21st in 1974, at the Third Session of the Fifth Supreme People’s Assembly that Kim Il Sung officially announced that taxes were abolished. According to a KCNA-piece published in 2009, highlighting the occasion, the decision was taken as a step towards full socialism and framed in a historical context.

Taxation was a vestige of the past: the Japanese colonial power had instituted a “predatory” tax system that Kim Il-sung had vowed already in the 1930s that he would get rid of.  (The Choson Dynasty (1392-1910), too, of course, had a tax system that could at times well be called predatory, but the KCNA piece does not mention this).

The ideological rationale, of course, is that under socialism, you don’t need taxation because private property has been abolished. In North Korea, collectivization of agriculture, for example, occurred only gradually. According to KCNA, agricultural taxes-in-kind were fully abolished by 1966. Given recent policy changes where farmers supposedly now get to keep a more significant share of their production than before, one could argue that taxation has in effect already been brought back to agriculture, and that the tax-in-kind-rate is around 70 percent.

So why could the government want to bring back taxation? Aside from the reasons given by the Joongang article, one could speculate about a possible connection with the remarks cited by KCNA earlier this year about party officials “seeking privileges, misuse of authority, abuse of power and bureaucratism manifested in the party” (February 4th, 2016).

Corruption is often an integral part of everyday life for anyone involved in business in a country that lacks a functioning rule of law. Corruption is known to be strongly institutionalized in North Korea, and when news of discontent come out of North Korea, it often has to do with arbitrary rule changes and regulations regarding market trading and business. A formalized tax system doesn’t itself guarantee a transparent set of rules and regulations, or that these rules are followed. But it is an almost necessary prerequisite.


Tax free North Korea

Saturday, March 21st, 2009

By Benjamin Katzeff Silberstein

Archived article from KCNA in 2009, acknowledging North Korea’s turn to a formally tax-free economy system in 1974 (found through a cached page here):

March 21. 2009 Juche 98

DPRK, First Tax Free Country

Pyongyang, March 21 (KCNA) — The DPRK promulgated the historic law on liquidating the tax system, a legacy of the old society, once and for all on March 21, Juche 63 (1974), declaring the DPRK, the first tax free country in the world.

President Kim Il Sung saw to it that the Third Session of the Fifth Supreme People’s Assembly of the DPRK adopted and promulgated the law to the whole world.

He expounded the establishment of a fair tax system in his famous work “The Ten-Point Programme of the Association for the Restoration of the Fatherland” already in the period of the anti-Japanese revolutionary struggle. After the national liberation (August 15, 1945), he made every possible effort to do away with the predatory tax system of the Japanese imperialists, establish a popular and democratic one in the country and lessen the tax burden of the people in a systematic way.

The DPRK reduced the income tax of the factory and office workers by 30 percent, alleviated the tax burden of private traders and industrialists considerably and scaled down the agricultural tax in kind from 25 percent of grain output to 20.1 percent again in 1955 after the Korean war, and to 8.4 percent from 1959.

Along with the progress of the socialist construction, the growth of income of the state-owned economy and the heightening of the political and ideological awareness of the working people, the agricultural tax in kind, which had been introduced right after the liberation, was completely abolished by the year of 1966 in accordance with the publication of “Theses on the Socialist Rural Question in Our Country” by the President. The tax paid by the people accounted for some two percent of the state budget revenue.

He promulgated his famous work “On Abolishing the Tax System” as a law of the Supreme People’s Assembly and thus abolished the tax system for good and brilliantly realized the long-cherished desire of the people.

The promulgation of the law was a historic event which brought to reality the ardent desire of the Korean people to live in a tax-free country and made them as the proud masters of the country free from tax. This opened up a new tax-free era for the humankind and demonstrated the incomparable superiority of the Korean-style socialist system and the might of the independent national economy.