The semiconductor windfall: Where should the extra tax revenue go?

Kwon Nam-hoon

The author is the president of the Korea Institute for Industrial Economics and Trade (KIET).

Even when a country suddenly finds itself with an unexpected financial windfall, difficult choices remain. Korea's booming semiconductor industry and strong exports have generated far more tax revenue than expected, raising a fundamental question: How should the government use it?

The debate began with labor negotiations at Samsung Electronics before expanding into arguments over so-called "excess profits" and "excess tax revenue." At a news conference marking the first anniversary of his inauguration, President Lee Jae Myung clarified that the government's focus is not on corporate profits but on additional tax revenue, which he said should be invested to strengthen Korea's long-term growth potential. That leaves a more important question unanswered: Where will the money have the greatest impact?

Clear definitions should come before policy debates. The term "excess profits" is misleading because there is no objective standard for how much profit a company should earn. A more accurate description is an "earnings surprise," a familiar term in financial markets. Some have instead described the gains as "windfall profits," implying they were achieved with little effort.

That characterization is difficult to accept in the semiconductor industry, where companies endure relentless competition, massive investment and continuous technological innovation while surviving repeated cycles of boom and bust. Treating large profits as unearned income simply because they exceed expectations risks discouraging future investment. That is why proposals such as windfall taxes or mandatory profit redistribution are fundamentally misguided.

The same distinction applies to "excess tax revenue." The phrase merely indicates that tax collections exceeded government forecasts. It does not mean the government suddenly has surplus money to spend. Since 2020, Korea has recorded annual managed fiscal deficits exceeding 100 trillion won (about $64.78 billion). Rather than cutting spending, the Lee administration has chosen to use fiscal policy more aggressively to stimulate growth and expand the future tax base. The president's remarks should be understood in that context.

The government can decide how to allocate additional tax revenue, but it cannot directly dictate how companies use their profits. Even the labor minister, who recently raised the idea of a "social solidarity wage system," acknowledged that distinction. Government policy can influence corporate behavior, but only through transparent, growth-oriented incentives rather than coercive measures.

Ultimately, policymakers have two responsibilities: Invest additional tax revenue where it produces the greatest economic return and encourage companies to reinvest higher profits in productive activities.

That discussion should begin with a basic reality of the semiconductor industry: It has always been cyclical. Every three to five years of expansion has historically been followed by a downturn. The current boom, which began in 2024, has been fueled by surging demand for AI data centers. Some argue that the AI revolution has permanently changed the industry's cycle, but that is unlikely. Downturns occur not because demand disappears but because supply eventually catches up. The greater the investment during a boom, the deeper the next correction is likely to be.

Manufacturers understand this risk, yet few can resist expanding production while prices remain exceptionally high. Beginning in 2027, new high-bandwidth memory production facilities operated by Samsung Electronics, SK hynix and Micron are expected to come online, adding substantial capacity to the global market.

China is also using the current boom to strengthen its semiconductor industry. Companies such as CXMT and YMTC are expected to become major suppliers of DRAM and NAND memory by expanding production. As Samsung Electronics once widened its lead during industry downturns, Chinese firms backed by state support could pursue the same strategy in the next slowdown. Maintaining Korea's leadership therefore requires companies to reinvest much of today's extraordinary profits in next-generation products, advanced manufacturing and the broader semiconductor ecosystem. Government policy should encourage those investments.

Additional tax revenue can also support other industries, but clear priorities are essential. Research by the International Monetary Fund suggests that expanding sectors where a country already has a comparative advantage is generally more effective than creating entirely new industries. Public support should focus on areas affected by market failures, projects beyond the capacity of individual firms and sectors that have become strategically important because of economic security concerns. It should also help Korean industries respond to increasingly aggressive competition from heavily subsidized Chinese companies.

By those standards, semiconductors remain the top priority, particularly in materials, equipment, advanced packaging and non-memory chips. Although Korea leads the global memory market, these areas remain comparatively weak despite their importance to future competitiveness. Investment in research, development and talent benefits the entire ecosystem, making government support especially valuable. Reviving the Advanced Semiconductor Technology Center, proposed in 2023 and modeled after Belgium's imec, would be a timely first step.

Some observers have warned of "Dutch disease," in which a booming export sector weakens other industries by pushing up the value of the national currency. That concern remains premature because the won has stayed weak against the dollar rather than appreciating sharply.

The more pressing issue is that Korean companies are increasingly reinvesting profits overseas instead of bringing capital home. If that trend continues, stronger redistribution policies would only reduce incentives for domestic investment. The lasting solution is to make Korea a more attractive place to invest through tax incentives, regulatory reform and infrastructure improvements. Reinvestment, not redistribution, will ensure that today's semiconductor boom becomes a foundation for long-term growth.