"School-Age Population Halved, but Education Tax Remains Unchanged [Tax System, Time for Reform]"

Education Tax Grows to Over 5 Trillion Won
Financial and Insurance Business Income Rises for Four Consecutive Years
Transportation, Energy, and Environment Tax Remains in the 1 Trillion Won Range
Criticism Over Violation of Purpose Tax Principles
Burden on Financial and Insurance Businesses Passed on to Consumers
"Should Be Used Elsewhere Instead of Local Education Financial Grants"

Questions regarding the appropriateness of the Education Tax continue to be raised. Although the school-age population has fallen to half its previous size, the amount collected from the Education Tax has actually increased. Despite being a purpose tax,it is also criticized for being levied not only on the income of financial and insurance businesses, but also on tax bases unrelated to education, such as the Transportation, Energy, and Environment Tax. Experts advise that spending related to the tax base of the Education Tax should be increased, or that revenue should be secured under a different name and allocated to areas where it is truly needed.

Parents and students visiting Changsin-dong Children's Toy Market in Jongno-gu, Seoul last February ahead of the new semester. Photo by Yonhap News

The Education Tax is a purpose tax collected to expand educational finances necessary for improving the quality of education. A purpose tax is a tax whose use is designated for specific expenses only.The Education Tax is used as a source for local education financial grants distributed to each provincial and metropolitan office of education.It is levied in addition to the income of financial and insurance businesses (0.5%), as well as on the Transportation, Energy, and Environment Tax (15%), Individual Consumption Tax (15-30%), and Liquor Tax (10-30%).

According to the National Tax Service,the amount collected from the Education Tax in 2023 was 5.1506 trillion won, an increase of 10.92% from the previous year. Looking at the data available from 2005 on the Public Data Portal, the collected amount, which was in the 3 trillion won range, reached the 4 trillion won range in 2010 (4.3072 trillion won), and then surpassed 5 trillion won in 2017 (5.0071 trillion won).Although the amount collected has fluctuated in recent years, it has remained around the 5 trillion won level.This is due to increases in the Education Tax collected not only from the Transportation, Energy, and Environment Tax, but also from the income of financial and insurance businesses.

In fact, the Education Tax collected from the income of financial and insurance businesses entered the 1 trillion won range in 2015 (1.0035 trillion won), and has increased for four consecutive years since 2020. In 2023 (1.7504 trillion won),it surpassed the amount from the Transportation, Energy, and Environment Tax (1.6272 trillion won) for the first time, accounting for the largest share (33.98%). From 2005 to 2022, the Transportation, Energy, and Environment Tax accounted for the largest share, remaining in the 2 trillion won range until 2021 (2.4964 trillion won), but since 2022 (1.6692 trillion won), it has remained in the 1 trillion won range due to fuel tax cuts.With the profits of financial and insurance businesses increasing,if the fuel tax cuts end, the Education Tax could increase even further.

The problem is that the increasing Education Tax is not being used properly. Since the Education Tax is a purpose tax, there should be a high correlation between the tax base and the use of the tax,but most tax bases, such as the income of financial and insurance businesses and the Transportation, Energy, and Environment Tax, have no direct connection to education. This has led to criticism of maintaining the Education Tax, which goes against tax principles, even though the school-age population, which once exceeded 10 million, has now been reduced by nearly half. Another issue is that the burden of the Education Tax imposed on financial and insurance businesses is ultimately passed on to related consumers.

The paper "A Study on the Reform of the Education Tax on Financial and Insurance Businesses: Focusing on the Appropriateness of Taxation and the Method of Calculating the Tax Base," published in Volume 42, Issue 1 of the Journal of Taxation Studies by the Korean Association for Tax Studies in March, stated that "If customers of financial and insurance services bear the burden of the Education Tax, it is appropriate for them to become future beneficiaries of specific public services that are expected as a result of paying the Education Tax."However, the current expenditures of the Education Tax are allocated to elementary and secondary education finances, which are not the specific public service benefits expected by financial and insurance service customers or financial and insurance businesses."

A research report titled "Evaluation of the Purpose Tax System and Policy Direction," submitted to the National Assembly Budget Office in 2022, also evaluated the Education Tax, stating that "most taxable items do not conform to the benefit principle." It also pointed out that "due to changes in the population structure, the number of students is decreasing, but since revenue is determined by the size of tax income, it is impossible to adjust revenue according to changes in expenditure demand." In reality, the local education financial grants funded by the Education Tax have had unused budget amounts remaining in the trillion-won range for several years, which has also been criticized.

Given these circumstances, there are ongoing calls not only for the abolition of the Education Tax but also for adjustments to the allocation of its resources. Proposals include using the Education Tax for financial and insurance education needed by users of those services, or utilizing it as a financial market stabilization fund, similar to the European Financial Transaction Tax. There are also arguments that the resources from the Transportation, Energy, and Environment Tax should be focused on resource development or fostering renewable energy. Some suggest using these funds to foster advanced industries such as semiconductors, batteries, and artificial intelligence (AI), which are key sectors in global competition.

The new administration is likely to examine the issue of the Education Tax being passed on to financial consumers. President Lee Jaemyung has previously pledged to amend the Banking Act to ensure that statutory costs, including the Education Tax, are not passed on to financial consumers when banks calculate additional interest rates, thereby reducing the burden of principal and interest repayment.However, the government has not yet presented a plan for a comprehensive reform of the Education Tax.In 2008, during the Lee Myungbak administration, a tax reform plan was proposed to abolish purpose taxes by integrating the Education Tax into the main tax.

Kim Woochul, a professor in the Department of Taxation at the University of Seoul, said, "There are two principles for purpose taxes: the beneficiary should bear the cost, or the party causing the cost should bear it, but the Education Tax fits neither." He added, "It is an exceptional type of purpose tax that goes against the principles of taxation." He continued, "The Education Tax goes into the local education financial grants, but since there are problems with these grants, it may be more appropriate to maintain the tax but collect and use it under a different name, rather than as the Education Tax."