[Initial Insight] Income Tax 'Reform' Is an Eternal Pending Task

The Yoon Suk-yeol administration’s decision to raise the lower two brackets of the income tax base in its first tax reform has sparked much controversy. Since it is the first adjustment to the income tax base in 15 years, it has drawn excessive attention. In fact, debates surrounding income tax have not changed since the participatory government era. The difference then was that it was the final tax law revision period ahead of the presidential election, a political event at the end of the administration, whereas this time it is the early stage of a government with historically low approval ratings. Although it is not a new issue, why has income tax once again become a hot topic?

So far, adjustments to the income tax base brackets have only been made in 1996 and 2007. Due to maintaining the income tax base brackets without major changes for a long time, the tax burden on salaried workers has gradually increased. Since real income has remained stagnant but nominal income has increased due to inflation, it is natural that citizens who fall into higher tax brackets with higher rates are closely watching the income tax reform.

The fact that the Yoon administration has dared to touch income tax after 15 years is commendable. However, contrary to the government’s stated intention of easing the tax burden on the lower and middle classes, there has been significant backlash accusing it of a “tax cut for the rich.” When controversy arose that this tax reform was a “tax cut for the wealthy,” focusing on cuts to corporate tax and comprehensive real estate tax, there were talks that the government hastily pulled out the income tax base adjustment card. Whether this was a well-intentioned lie or not is unclear, but until the day Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho reported to President Yoon Suk-yeol, the Ministry of Economy and Finance’s tax office staff had dismissed the possibility of including income tax reform in this tax law revision. After President Yoon’s official remark to “prepare measures to reduce the tax burden on the middle class,” the atmosphere in the tax office changed 180 degrees.

The process was questionable, so the results were unsurprisingly unsatisfactory. The income tax reform was limited to raising the lower two brackets of the tax base without adjusting tax rates. As a result, workers earning between 74 million and 120 million KRW in total salary, roughly around an annual salary of 100 million KRW, were the biggest beneficiaries. Although the tax reduction amount for the low-income tax base brackets is not large because the taxes paid are not much, the Ministry of Economy and Finance’s repeated explanation that the reduction rate is high and thus these groups relatively benefit is reasonable, but the actual outcome is as such.

The proportion of tax-exempt earners who pay no taxes at all has further increased. As of 2020, there were 19.49 million wage earners subject to income tax, of whom 7.25 million, or 37.2%, fall below the tax base threshold and pay no income tax. This means nearly 4 out of 10 Koreans bear no income tax burden. This contradicts the tax principle of universal taxation, which holds that all citizens should pay taxes, and there have been continuous calls to correct this broken equity. This is why proposals to introduce a minimum tax continue to emerge. According to government estimates, the number of tax-exempt earners will increase by about 1 percentage point due to this income tax reform.

Compared to advanced countries such as the United States (31.5%) and Japan (15.1%), Korea’s high proportion of tax-exempt earners has prevented even the first steps toward introducing an inflation-indexing system. The inflation-indexing system, which the then Ministry of Finance and Economy’s tax office chief 15 years ago said would be tackled as a mid- to long-term task, has regressed under the current administration. The government’s judgment is that since many wage earners do not pay taxes, even if the tax base brackets are adjusted in line with inflation, the tax benefits will ultimately be concentrated on high-income earners rather than the low-income class. Another problem is that it is impossible to predict when the next income tax reform, which occurs on a cycle of more than 10 years, will take place. A complete income tax reform seems destined to remain an eternal aspiration.