The National Assembly’s Special Committee on Budget and Accounts has recently pointed out in a report the need to reduce the proportion of wage earners exempted from income tax.
The committee has expressed concern that the ever-expanding share of workers who do not pay any income tax could have negative effects on the government’s tax revenue in the long term as it would deter the expansion of the taxation base.
Last year, of the 16.7 million Korean workers, 8.02 million, or 48.1 percent, did not pay any income tax. The proportion is high compared with 15.8 percent in Japan, 19.8 percent in Germany and 22.6 percent in Canada.
The National Assembly Budget Office estimates that income tax exemptions and reductions would total 19.4 trillion won this year, accounting for 55 percent of all national tax cuts.
Last year, the government collected 62 trillion won in income tax, which represented 3.7 percent of Korea’s gross domestic product, much lower than the OECD average of 8.6 percent.
In Korea, the effective income tax rate for people in the bottom 50 percent of incomes is a mere 0.5 percent, less than one-tenth of the OECD average of 5.4 percent, reflecting the abnormally large share of wage earners totally exempt from income tax.
One key principle in tax policy is to broaden the tax base while keeping tax rates low. The need for Korea to expand the tax base is all the greater in light of its low birth rate and rapid population aging. Due to the changing demographic structure, Korea will see its welfare spending increase amid a shrinking taxation base.
Despite the need to enlarge the tax base, lawmakers on both sides of the aisle have been eager to offer income tax cuts to woo voters. Their populism has distorted the income tax structure.
Nevertheless, legislators continue to put forward proposals for income tax cuts. Since the opening of the 20th National Assembly a month ago, 12 bills have been submitted to introduce new income tax cuts or extend the existing ones.
Politicians should be more prudent in offering tax cuts. They need to introduce measures that would significantly reduce the pool of workers exempted from income tax. If they want to make affluent people pay more taxes, they first need to ensure that most workers pay taxes on their income, however small the amounts may be.
