[Exclusive] Democratic Party's 'New Welfare' Report: "Tax Increase Under Mid-to-Long-Term Review... Starting with Income Tax on Annual Salaries Over 100 Million Won"

Reforms to Reduce 'Fiscal Barriers', Tasks Including Formalizing the Underground Economy
Significant Impact Expected from Corporate and Value-Added Tax Increases

Source: Minjoo Research Institute

[Asia Economy Reporter Park Cheol-eung] In a new welfare report prepared by the Democratic Research Institute, the think tank of the Democratic Party of Korea, a phased approach to securing financial resources includes a proposal for tax increases. The suggestion is to start by raising income tax on high-income earners with annual salaries exceeding 100 million KRW, followed by considering increases in corporate tax and value-added tax (VAT). The Democratic Party plans to present specific policies based on this report.

The Democratic Research Institute recently published the report titled "Post-COVID New Welfare System ? Vision and Policies for Recovery and Leap," authored by eight researchers including internal research fellows and external academics. Although it was stated that the report does not represent the official stance of the institute, Lee Nak-yeon, leader of the Democratic Party, mentioned in his recommendation that "it will serve as a meaningful textbook for concretizing the new welfare system."

Professor Yoon Hong-sik of Inha University’s Department of Social Welfare proposed in the introductory Chapter 1 a nationwide social insurance system encompassing all citizens to be institutionalized over ten years starting next year. He also suggested life-cycle social allowances for youth and middle-aged groups, a national basic living security system guaranteeing median income, and a state responsibility system for care.

As a phased plan for securing financial resources, the report proposed the abolition and reduction of tax exemptions, progressive universal tax increases centered on income tax, increases in social security taxes (contributions), and increases in VAT, in that order.

Senior Research Fellow Lee Sang-min of the National Fiscal Research Institute analyzed specific fiscal strategies. In the short term, increasing public social welfare expenditure through national debt could be one option. He suggested actively utilizing relatively favorable fiscal indicators.

He also emphasized the need to reduce the "fiscal partition where one side has surplus funds and the other side lacks funds" by reforming central and local governments and legalizing the underground economy to secure resources.

The researcher stated, "The available funds in business funds, lottery funds, and two special accounts alone amounted to a total of 32.8 trillion KRW in 2021."

Regarding 'hidden resources,' the report proposed mandatory reporting of all overseas assets and strengthening penalties for violations. Allowing the National Tax Service to access information from the Financial Intelligence Unit could play a positive role in reducing tax evasion. It also included converting tax exemptions into fiscal expenditures.

Tax increases were presented as a mid- to long-term reform task. The researcher said, "In Korea, the issue of tax increases is more of a political issue than an economic or welfare issue," adding, "For permanent, stable, and general welfare funding and fiscal stability, tax increases should be considered in the mid to long term."

He further noted, "Income tax, which is already levied progressively, is a politically agreeable method of tax increase from the perspective of wealth redistribution, and Korea’s income tax burden rate is still lower than the OECD average."

If tax increases are implemented, it would be desirable to apply them starting with high-income earners whose taxable income exceeds 88 million KRW, corresponding to annual salaries over 100 million KRW. Raising the tax rate by 2 percentage points would generate a tax revenue effect of 3.3 trillion KRW combining earned income, comprehensive income, and capital gains income; a 3 percentage point increase would reach 5 trillion KRW.

Regarding corporate tax, since the difference from the OECD average is not large, a cautious approach is necessary, but the effect is greater than that of income tax increases. Raising the corporate tax rate by 2 percentage points on taxable income exceeding 20 billion KRW would yield 4.6 trillion KRW, and a 3 percentage point increase would reach 7 trillion KRW.

The researcher also commented on VAT, stating, "Considering that the average VAT rate among OECD countries is 19.3%, with the UK and France at 20%, and Sweden at 25%, there is room for increasing the rate. However, politically, raising VAT may not be an easily acceptable alternative." He analyzed that increasing the VAT rate by 2 percentage points could generate 13 trillion KRW in tax revenue.