[Reporter’s Notebook] How to Enhance the Value of Earned Income

The government recently announced the October 15 real estate measures, but the market appears to be in turmoil, and public discontent has yet to subside. At the root of this situation lies the deep-seated obsession with real estate among people in Korea.

According to the 2024 Household Finance and Welfare Survey, 75.2% of household assets in Korea are tangible assets, primarily real estate. Because the rate of increase in real estate prices far outpaces wage growth, there is a prevailing sentiment that building up borrowing capacity to purchase an apartment is considered the hallmark of a "successful life," rather than working hard at one's job. Especially during periods of rapid real estate price increases, as seen recently, the gap in personal wealth based on apartment ownership widens significantly, inevitably intensifying feelings of relative deprivation.

In such a society, the value of earned income becomes relatively diminished. Instead of praising those who diligently perform their duties and earn a salary through workplace achievements, society tends to revere those who rapidly grow their assets through various investments. While investing itself is not inherently wrong, a society that continually undervalues earned income is not a healthy one. Although it may be difficult for wage income to outpace capital gains from rising asset prices, there is a need to foster a social atmosphere that respects and values earned income.

Let us examine the tax system among government policy tools. Taxation on housing comes with several benefits. For capital gains tax, there is a long-term holding special deduction of up to 80% for those who own a single home, depending on the holding period. Regarding property tax, the current official appraisal rate for multi-unit dwellings is an average of 69% compared to market value. Furthermore, when calculating the tax base, the fair market value ratio applied is around 60%. Although there are various deduction systems for earned income, such as personal exemptions and credit card deductions, the annual benefits are typically only a few million won at best, and in most cases, less than one million won.

In particular, there are almost no tax benefits for incentive-based income within earned income, such as stock options, bonuses, or technology development payments. Given the current shortage of tax revenue, it may not be feasible to increase deductions for all earned income, but it is worth considering preferential measures such as tax deferral for performance-based income. This would not only enhance the value of performance-based income but also help foster an organizational culture that places importance on performance.

Currently, bonuses and similar incentive payments are included in earned income along with base salary and are subject to the standard progressive tax rates. For example, if an employee with an annual salary of 50 million won receives a technology development payment of 100 million won, 38 million won of that payment is taxed at 24% (the rate for the 50 million to 88 million won bracket), and the remaining 62 million won is taxed at 35% (the rate for the 80 million to 150 million won bracket). If a 10-year tax deferral benefit were introduced, only 10 million won per year would be recognized as income over 10 years, and the entire amount would be subject to the 24% tax rate.

Of course, such a system would not instantly change the prevailing attitude that values assets over income. However, given how sensitive society is to taxes, these tax benefits could serve as a nudge effect-as emphasized in behavioral economics-gently guiding people toward certain choices rather than forcing them. This could also help alleviate, at least to some extent, the critical perspective of wage earners who view income tax as unfairly targeting salaried workers.