[Why the Government] Social Solidarity or Tax Resistance... Where Will Public Sentiment Go After Tax Increase?

After the 2020 Tax Law Amendment Announcement, the Backlash Intensifies

[Sejong=Asia Economy Reporter Kim Hyunjung] The tax reform direction revealed by the government through the '2020 Tax Reform Proposal' shows a trend of increasing taxes on the wealthy and reducing taxes for the common people. In particular, the government explicitly expressed its intention to alleviate the polarization caused by the recent COVID-19 pandemic by mentioning 'social solidarity' and urging high-income earners with taxable capacity to pay a little more tax. It is difficult to predict whether public opinion will converge toward accepting tax increases and overcoming the immediate challenges together despite temporary controversies and conflicts, or whether tax resistance emerging in some quarters will intensify further.

One of the most noticeable points in the tax reform proposal announced on the 22nd was the establishment of a new tax bracket for taxable income exceeding 1 billion KRW and raising the top income tax rate to 45%. Accordingly, the top tax rate, which was 38% from 2014 to 2016, increased to 40% in 2017, 42% in 2018, and will be 45% in 2021. Under the Moon Jae-in administration alone, it has risen by 5 percentage points, marking the highest rate in 26 years since 1995 (45%).

The government directly mentioned that the reason for raising the top income tax rate is "part of strengthening social solidarity to overcome the COVID-19 crisis." In the materials distributed at the time, the government explained, "Due to the ongoing COVID-19 pandemic, difficulties for low-income groups are increasing. In the first quarter of 2020, labor income for the lowest income quintile decreased, and the quintile ratio increased, leading to worsening distribution conditions. The tax burden is being selectively strengthened on high-income earners (0.05%) who are relatively less affected by COVID-19 and have taxable capacity."

This decision by the government effectively accepts the so-called 'Solidarity Surcharge' proposed by the International Monetary Fund (IMF) in April. The IMF suggested in a report that, given the global economy is expected to contract by 3% this year due to the impact of COVID-19, measures to increase taxes on income, real estate, and wealth should be considered to establish an economic protection fund.

[Image source=Yonhap News]

However, as the government also proposed significantly strengthening holding and transaction taxes on real estate and transaction taxes on stocks, a 'tax resistance movement' is beginning to stir. Those leading the tax resistance argue that social solidarity should be achieved through sufficient discussion and consensus with each social class, which has not been the case. Rather, they claim that the government's move to increase tax burdens temporarily and divisively is close to 'embezzlement.' A related petition on the Blue House's public petition platform was posted on the 14th, after the outline of real estate and financial tax reforms was announced, and had garnered about 68,600 signatures as of the morning of the 24th.

An offline rally is also scheduled. A candlelight protest condemning the government's tax reform and real estate policies will be held near Euljiro 1(il)-ga Station in Seoul from 7 p.m. on the 25th. The rally is led by four groups: the association for victims of the retroactive application of the June 17 regulations, the association for victims of the July 10 acquisition tax, the steering committee of the Rent Business Association, and the opposition group to the three lease laws. Citizens opposing real estate policies are expected to gather mainly at this event.

Experts view this backlash as resulting from imposing too sudden a burden on the taxpayers who should be the subjects of 'solidarity.' Professor Kim Woochul of the Department of Taxation at the University of Seoul pointed out that the increase in the top tax rate is too abrupt. He said, "About 16,000 people will pay income tax at the top rate, but since this was implemented without prior discussion, it inevitably feels unilateral, which is essentially a tax increase on the wealthy," adding, "In terms of lacking social consensus, this tax reform loses both legitimacy and practical benefits (such as the additional tax revenue of 900 billion KRW from the top rate increase)."