(CNN) -- South Korean President Lee Myung-bak has proposed a plan to reunite his country with North Korea and suggested a tax to prepare for the costs expected, if the two countries come together, South Korea's state media said Sunday.

"Today inter-Korean relations demand a new paradigm," Lee said in a speech to mark the 65th anniversary of Korea's independence from Japanese colonial rule, Yonhap reported.

Lee said the two countries should form a "peace community" and stressed the importance of the denuclearization of North Korea, Yonhap reported. He added that inter-Korean exchanges are needed to help build North Korea's economy, according to Yonhap.

"It is imperative that the two sides choose coexistence instead of confrontation, progress instead of stagnation. The two of us need to overcome the current state of division and proceed with the goal of peaceful reunification," Lee said, according to Yonhap.

The president's Grand National Party took a beating in recent local elections, which analysts see as a referendum on his response to the sinking of a South Korean warship.

The South Korean naval ship Cheonan sank March 26, killing 46 sailors and raising tensions on the Korean Peninsula.

North Korea has denied charges it fired a torpedo that sank the Cheonan.