[2023 Tax Reform] Tax Reform Blocked by the Giant Opposition Party

Government Announces 2023 Tax Law Revision Plan
Tax Revenue Decrease Limited to 471.9 Billion KRW

Despite a large-scale tax revenue shortfall this year, the government maintained a 'tax burden relief' stance in the tax law revision that determines next year's tax revenue. This decision takes into account the expected improvement in tax revenue conditions following economic recovery. While the tax cut policy is maintained, its scale is expected to be only about 15% of last year's level. This contrasts with the large-scale tax reform pursued last year, the first year of the Yoon Seok-yeol administration, which anticipated a tax cut effect of 13 trillion won.

Since major issues reflecting the national philosophy, such as corporate tax, income tax, and comprehensive real estate tax, were revised last year, this year’s tax law revisions are evaluated to have focused on supporting the livelihood of the working class and middle class. The government explained that it concentrated on enhancing private sector-led economic vitality and overcoming structural crises in the economy such as marriage and childbirth.

According to related ministries on the 28th, the '2023 Tax Law Revision' announced by the government the day before is expected to result in a tax cut effect of 471.9 billion won over the next five years. Income tax and value-added tax are expected to decrease by 590 billion won and 43.7 billion won, respectively. On the other hand, corporate tax is estimated to increase by 169 billion won. Factors reducing revenue include the expansion of child tax credits (-530 billion won) and non-taxation of childbirth and childcare allowances (-64.2 billion won), while the rationalization of the non-inclusion of dividend income regulation (175.1 billion won) was a factor increasing revenue.

The scale of the tax cut has significantly retreated compared to the past. Typically, when estimating tax revenue effects, the government uses the 'net method,' which aggregates the increase or decrease in tax revenue compared to the previous year. Applying the same standard as the government, last year's tax revenue effect was 13.1 trillion won, which is 1.27 trillion won more than this year. In particular, this year's tax cut scale is smaller than during the Moon Jae-in administration, which pursued expansionary fiscal policy. The 2019-2020 tax law revisions were expected to have a tax increase effect of 900 billion won, but in 2018, a tax cut effect of 2.5 trillion won and in 2021, a tax cut effect of 1.5 trillion won were announced. This tax law revision excludes additional corporate tax cuts as well as real estate tax law revisions such as the relaxation of the heavy taxation rate on real estate capital gains tax, which had initially raised expectations.

Choo Kyung-ho: "Last year we pursued large-scale tax reform... This year only necessary parts"

The Ministry of Economy and Finance explained that since a challenging goal was set last year, this year they chose 'maintenance and stability.' The ministry stated, “Considering the difficult economic conditions, tax policies for stabilizing people’s livelihoods are necessary now,” and “This year’s tax law revision focuses on supporting the working class, middle class, and future generations.” Choo Kyung-ho, Deputy Prime Minister and Minister of Economy and Finance, said, “As you know, last year we pursued large-scale tax reform and submitted an ambitious plan, much of which was enacted by the National Assembly,” adding, “It was not easy to carry out another large-scale reform, and this year we included as much as necessary based on last year.”

However, experts evaluated that the limited scale of the tax cut would have a restricted effect on economic stimulus. Joo Won, head of the Hyundai Research Institute, explained, “Given the shortage of tax revenue, it is difficult for the government to prepare a large tax cut plan,” but added, “Since the scale of tax cuts that can stimulate domestic demand is limited, the impact on the economy will not be significant.” Kim Dae-jong, professor of business administration at Sejong University, said, “To promote corporate reshoring or investment, the option of corporate tax cuts was necessary.”

Behind this lies a realistic reason called ‘politics.’ Despite the need for tax cut policies, the government could not prepare necessary tax reform plans due to the minority ruling situation. A representative tax item is corporate tax. Unlike last year, this year’s tax reform plan excludes corporate tax reduction proposals. Deputy Prime Minister Choo said, “We submitted a corporate tax reform plan to the National Assembly because it was necessary to lower the top tax rate bracket and simplify the brackets, but it was not finalized due to strong opposition from the opposition party,” adding, “The National Assembly situation is the same as last year, and if the government resubmits the same content, there does not seem to be any special progress.”

There is also the aspect that due to the tax revenue shortfall problem, a bold tax reform plan could not be prepared as needed. From January to May this year, national tax revenue was 36 trillion won less than the previous year. This was because corporate tax revenue was 17.3 trillion won less due to poor corporate performance. Currently, the decrease in tax revenue is the largest compared to the previous year. In this situation, if a drastic tax reform plan were submitted and the economy did not recover, it could cause difficulties in next year’s national budget planning.

A Ministry of Economy and Finance official explained, “It was difficult to present the corporate tax reduction plan again, which was concluded after intense negotiations between ruling and opposition parties in the National Assembly last year.” The official added, “Although the scale of tax cuts has been significantly reduced compared to last year, the proportion of the tax cut scale of 500 billion won out of about 400 trillion won in tax revenue is only 0.1%, so it is judged that the impact on the fiscal situation will not be significant.”