Last updated: August 15, 2010 4:58 pm

Seoul proposes Korean unification tax

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Lee Myung-bak, South Korea’s president, proposed an unexpected new tax on Sunday to fund the future cost of unification with North Korea.

Tensions on the peninsula have run particularly high since South Korea accused the North of sinking one of its warships, the Cheonan, in March.

Unification has not been under discussion and the proposal marks a significant change in tone for Mr Lee, who had until now treated integration as an extremely distant and theoretical concept.

“The time has come to start discussing pragmatic policies,” Mr Lee said in a speech to mark the 65th anniversary of the peninsula’s liberation from Japanese rule. “Reunification will definitely come.”

Mr Lee said a panel of experts would have to discuss how to levy the tax.

The conservative president did not say why he felt unification had become a more pressing concern, but security services increasingly fear a collapse of the northern regime. Kim Jong-il, its leader, is feared to be in poor health after, it is widely suspected, suffering a stroke in 2008.

After observing the tremendous cost paid by West Germany when it rejoined East Germany, South Koreans have long feared the price of unification – estimated by the government at more than $1,000bn (€784bn, £641bn) – despite their cultural longing for it. Many South Korean officials also argue that cheap labour and the potential for development in the North could make a united Korea more equal to Japan.

In his speech, Mr Lee stuck to his hardline policy on North Korea, saying Pyongyang should dismantle its nuclear arms before the two sides forge an economic rapprochement. He has offered $40bn in infrastructure and other incentives if Pyongyang disarms.

Many South Korean officials favour keeping the North as a semi-autonomous investment enclave while the two economies gradually integrate, although they acknowledge this could intensify problems of social division.

The North is expected to react poorly to the tax plan as it usually responds angrily to any discussion of unification which implies regime change. Compounding Pyongyang’s bile, the US and South Korea will begin a new round of military drills on Monday.

South Korea’s economy is surging out of the economic downturn and is expected to post economic growth of about 6 per cent this year. A new tax could be unpopular as many households are deeply in debt, anxious about sliding house prices and grappling with high education bills.

However, the tax plan could reinvigorate Seoul’s unification ministry, a high-profile agency in previous administrations that has been largely sidelined under Mr Lee.

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