[The Editors' Verdict] Reduce Income Tax Burden Before 'Verbal Intervention' on Wages

[Asia Economy Jung Doohwan, Trend Managing Editor] "I haven't bought much, but it already exceeds 200,000 won."

On a weekend evening, a housewife's muttering at the checkout counter of a discount mart is full of sorrow. As she said, there are no particularly expensive items visible in her cart.

The consumer price inflation rate announced by Statistics Korea on the 5th recorded 6.0% last month. This is the first time in about 24 years that the inflation rate has reached the 6% range. Even the 6% figure for grocery prices is hard to accept. This is due to the difference between statistics and perceived inflation. Setting aside detailed numerical debates, it is clear that soaring prices are threatening the household finances of ordinary people.

Meanwhile, a remark by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho at a meeting with the Korea Employers Federation (KEF) chairpersons at the end of last month has sparked controversy.

The gist of his statement is as follows: "So-called successful, financially strong top-tier companies are competitively leading high wage increases under the pretext of performance rewards or talent acquisition." "Excessive wage increases not only exacerbate the high inflation situation but also widen the wage gap between large corporations and small and medium-sized enterprises." This part was acceptable. However, his request that "the business community refrain from excessive wage increases considering the difficulties of our economy" faced strong criticism from labor groups, who said it "crossed the line."

Deputy Prime Minister Choo's remarks inevitably led to interpretations that he was making a ‘verbal intervention’ on wage increases or effectively providing guidelines to companies ahead of wage negotiations.

Despite the predictable controversy, it is understandable why such remarks were made. With high interest rates, high inflation, and supply chain crises all combined to shake our economy, the new government is staking its fate on controlling inflation.

Nevertheless, his remarks were inappropriate. They seemed to imply that the government is blaming the cause of high inflation on companies' competitive wage increases.

Naturally, the labor sector reacted strongly. They perceive Deputy Prime Minister Choo's remarks as a threat to their right to livelihood. If wage increases do not reflect soaring prices, real wages effectively decrease.

The business community, on the surface, appears to ‘welcome’ Minister Choo’s remarks, but their true feelings are complicated. Especially the information technology (IT) industry, suffering from a labor shortage, views wage increases not as a choice but as a matter directly linked to corporate survival, so they are not in a position to accept Deputy Prime Minister Choo’s verbal intervention.

Here is a suggestion. If the government truly wants companies to restrain wage increases, it should also offer some kind of gift. How about a ‘income tax reduction’ as a carrot?

Despite ongoing inflation, South Korea’s earned income tax system has remained unchanged for 15 years. The income tax brackets and rates set by the government in 2008 are progressive: 6% for income up to 12 million won, 15% up to 46 million won, 24% up to 88 million won, and a sharp jump to 35% beyond 88 million won. While wages have increased to some extent due to inflation, the tax brackets have remained the same, resulting in a structure where the tax burden on salaried workers increases more steeply.

In fact, although it varies depending on family composition and other factors, a salaried worker earning 100 million won annually reportedly takes home about 6.5 million won per month after various taxes. This is the current reality of the ‘hundred million won annual salary’ once considered a dream for office workers. It is no wonder that after difficult wage negotiations between companies and workers, there is a self-deprecating complaint that the only ones who truly benefit are the ‘government.’

Considering the already large government spending, tax cuts are certainly a burden. Still, if the government requests companies and workers to restrain wage increases, it should also show that it is tightening its belt.