"Education Tax" First Introduced in 1958 ... Changed from Temporary to Permanent in 1990 [Tax System, Time for Reform]

Temporary Tax Introduced for Compulsory Education
Reintroduced in 1982 for Education Reform
Calls for Reform Continue Amid Declining School-Age Population

One of the main pillars responsible for education funding in South Korea, where human resources are a key asset, has been the education tax. The education tax was introduced in 1958, when the scars of the Korean War still remained. The Syngman Rhee administration, which placed great importance on education, enacted the Compulsory Education Grant Act and the Education Tax Act in August of that year, introducing the education tax to secure funding for the operation of compulsory education. Since it was difficult to secure sufficient finances through the general budget alone, a purpose-specific tax was introduced. At that time, progressive tax rates were applied to the taxable bases of income tax and corporate tax.

The education tax was abolished once in 1961. The Park Chung-hee regime, which came to power after the 5·16 military coup, pushed for tax reform and eliminated the education tax. It was reintroduced in 1982. During the Fifth Republic (under Chun Doo-hwan), education reforms such as the ban on private tutoring were implemented, and in this process, the Education Tax Act aimed at securing funds for improving educational facilities and teacher treatment passed the National Assembly (then called the legislature) at the end of 1981. As a result, interest and dividend income subject to separate taxation, income from financial and insurance businesses, liquor tax, and a portion of tobacco sales were collected as education tax.

At that time, the education tax was a temporary tax with a five-year term, set to expire in 1986. However, as education spending continued to rise, the term was extended by another five years. At the end of 1990, the expiration provision was abolished, converting the education tax into a permanent tax. During this process, the purpose of the education tax was changed to "securing the financial resources necessary to expand education funding for the qualitative improvement of education." Some of the tax base from the abolished defense tax was transferred to the education tax, and special consumption tax (now individual consumption tax), registration tax, property tax, and automobile tax were included as taxable items. The failure to anticipate population decline and the conversion of the education tax into a permanent tax at that time is now seen as a problem.

In 2001, the education tax was divided into national and local taxes. At that time, the tax rates for some items, such as leisure tax, tobacco consumption tax, and liquor tax, were raised. In 2005, revenue from the national education tax was included as a source for local education finance grants. Subsequent amendments to the Education Tax Act in 2009 and 2017 expanded the scope of taxable financial and insurance businesses.

Although the education tax is still maintained, calls for reform are gradually increasing. In its 2023 report, "Administrative and Fiscal Reform Measures for Primary and Secondary Education Suitable for a Shrinking Population Society," the Korea Development Institute (KDI) pointed out, "There is neither goal-setting for primary and secondary education outcomes nor review of whether those goals are achieved, and despite a sharp decline in educational demand, the current system mechanically links the education budget to domestic tax revenue and expands it in priority over other spending areas. This can hardly be considered a desirable way to allocate the budget."

The school-age population (ages 6-21) in South Korea remained above 10 million from 1965 (10.4 million) but fell below 10 million in 2010 (9.95 million). This year, it has decreased further to 6.98 million. According to future population projections by Statistics Korea, the school-age population is expected to continue declining, reaching 5.97 million in 2030 and 3.77 million in 2060.