Silent Tax Hike on Salaried Workers... Income Tax Brackets Need Reform [Tax System, Time for Change]

Since Last Year, Earned Income Tax Surpasses Corporate Tax
Need to Expand Basic Deduction
Some Income Tax Brackets Should Be Raised

The proportion of earned income tax in total tax revenue has surpassed that of corporate tax, leading to criticism that salaried workers are bearing an excessive tax burden. This assessment is based on the fact that, despite rising prices, the taxable income thresholds and deduction amounts for income tax have remained largely unchanged, resulting in an effective increase in the real income tax burden. There are growing calls to increase the basic deduction, which has remained stagnant for 16 years, and to revise the taxable income brackets through tax reform.

According to the National Tax Service on July 11, earned income tax revenue reached 64.2 trillion won last year, surpassing corporate tax revenue (62.5 trillion won) for the first time. This means that the tax contribution of salaried workers has exceeded that of corporations. The real wages of earned income workers have declined due to nominal wage increases that have not kept pace with inflation, but their income tax burden has continued to rise. When nominal wages increase while the income tax brackets remain fixed, higher tax rates are applied, resulting in a heavier tax burden.

According to annual statistics from the National Tax Service, from 2005 to 2023, the tax burden increased 6.1 times, outpacing the 1.5-fold increase in prices. Researcher Chae Eundong of the Democratic Research Institute noted that the effective tax rate nearly doubled from 3.5% in 2009 to 6.5%. This is because, under the progressive income tax system based on nominal wages, earned income workers have been subject to higher tax rates in elevated taxable income brackets. Although the actual amount of salary that can be used has not increased significantly, it appears on paper as if workers are receiving higher salaries, leading to higher taxes.

In contrast, the basic deduction for income tax has been frozen for 17 years. The basic deduction for income tax has remained at 1.5 million won per person since it was raised from 1 million won in 2009. During the same period, consumer prices rose by nearly 40% from January 2009 to January 2025. While prices increased by almost 40%, the deduction remained unchanged, resulting in a "silent tax increase."

The taxable income brackets for income tax have also remained largely unchanged since the 2008 revision. In line with the tax reduction policy of the Lee Myungbak administration in 2008, the entire bracket structure was adjusted upward from ▲ up to 10 million won, 10 million to 40 million won, 40 million to 80 million won, and over 80 million won to ▲ up to 12 million won, 12 million to 46 million won, 46 million to 88 million won, and over 88 million won. In 2009, the tax rate for income up to 12 million won was lowered from 8% to 6%, for 12 million to 46 million won from 17% to 16%, and for 46 million to 88 million won from 26% to 25%. The rate for income over 88 million won remained at 35%. In 2010, the tax rate for 12 million to 46 million won was reduced from 16% to 15%, and for 46 million to 88 million won from 25% to 24%.

Fifteen years after the overall upward adjustment of the taxable income brackets, the minimum threshold was raised from 12 million won to 14 million won (6% tax rate) in 2023, and the 15% tax rate bracket was raised from 46 million won to 50 million won. However, there were no changes to the other brackets. Lim Jaebum, an investigator at the National Assembly Research Service, explained at a forum on rationalizing earned income tax held at the National Assembly in April, "Only about one-third to two-thirds of the cumulative inflation rate of 25.5% at the time was reflected, and the other taxable income brackets remained unchanged. Since 2008, prices have risen by 39.8%, but this inflation has not been properly reflected in income tax, resulting in an increased tax burden."

In response to these concerns, there were calls during the last presidential election, particularly among political circles, for both adjustments to the taxable income brackets and an increase in the basic deduction. The Democratic Party of Korea even proposed an amendment to the Income Tax Act to raise the 6% tax rate bracket from 14 million won to 15 million won, the 15% bracket from 50 million won to 53 million won, and the basic deduction to 1.8 million won. At the time, lawmaker Lim Gwanghyun of the Democratic Party stated, "Representative Lee Jaemyung emphasized the urgent need to increase the disposable income of salaried workers by making the basic deduction for earned income more realistic," and added, "We must prevent forced tax increases on salaried workers and pursue fair and rational taxation." President Lee Jaemyung also stressed during the presidential campaign, "Salaried workers are not a cash cow," highlighting the need to restructure the earned income tax system. The People Power Party went further by proposing an income tax indexation system linked to inflation. There are also suggestions to adjust the lower brackets to larger round numbers, such as 15 million won, 50 million won, and 90 million won, similar to the previous thresholds of 10 million, 40 million, and 80 million won.

However, since the presidential election, related discussions have subsided. This is because, given the current state of national finances, such measures could lead to a significant decrease in tax revenue. At the time, lawmaker Lim estimated, "The expected annual decrease in tax revenue would be about 1.1 trillion won from earned income tax and 800 billion won from comprehensive income tax, totaling approximately 1.9 trillion won." However, he also assessed, "Considering that the cumulative increase in earned income tax revenue over the past four years alone amounts to 61 trillion won, this is a manageable level of adjustment."

If a comprehensive upward adjustment of all taxable income brackets is difficult, some suggest that changes should be made to the lower brackets. While it is true that the income tax burden in Korea has increased, it still falls short of the average effective tax rate among OECD member countries. Therefore, it is argued that adjustments should begin with the lower brackets. Rather than changing all six brackets, it is suggested to start by raising the 6% tax rate bracket (for taxable income of 14 million won or more) and the 15% tax rate bracket (50 million won). There are also calls to increase the basic deduction. At the aforementioned forum, researcher Chae Eundong argued that the deduction should be raised from the current 1.5 million won to 1.7 to 1.8 million won. If raised to 1.7 million won, it would require a total of 2 trillion won in fiscal resources, including 1.5 trillion won for earned income tax and 500 billion won for comprehensive income tax.