The South Korean government held a tax system improvement deliberation committee meeting on Wednesday and finalized a tax law revision bill for next year. It is a typical “more tax for the rich and less tax for the poor” bill, which will increase the maximum income tax rate to impose more tax on the wealthy and reduce the tax burden for small business owners. As discussions with the Democratic Party of Korea that is currently dominating parliamentary seats have been already completed, the bill is expected to be enforced as it is.
The surprise factor of the revision bill is the income tax rate increase. It will impose the tax rate of 45 percent – three percentage points higher than the current maximum rate – by creating a category of people who earn over one billion won. This will lead to an additional 900 billion won of tax every year collected from 16,000 people. With the new bill, the Moon Jae-in administration, which also raised the maximum income tax rate from 40 percent to 42 percent in 2017, will be one of the rare cases of increasing income tax twice during a presidential term.
Comprehensive real estate tax will rise 0.1 to 0.3 percentage points for single homeowners while the maximum rate for people who own three or more houses or own two or more houses in restricted areas will increase to 6.0 percent. Multiple homeowners who sell their houses after June 2021 will have to pay a punitive transfer income tax of up to 75 percent.
Annual sales criteria for those eligible to the simplified taxation of the value-added tax will be raised to 80 million won, reducing 500 billion won of tax for about 230,000 business owners. The tax affairs authorities have been strongly opposing the expansion of simplified taxation eligibility as it is against the principle of transparency of tax revenue sources. However, it was included in the recent revision due to strong demands from the ruling party.
As President Moon put bakes on, transfer income tax for profits from stock trading while securities transaction tax will be reduced in 2021, a year earlier than initially planned. This clearly demonstrates that the revision bill intends to remove any elements that may cause complaints from the ruling party’s potential supporters and to increase the tax burden for “those who have more” to the maximum.
The tax burden will increase for the top 10 percent income earners who have been responsible for about 80 percent of national earned income tax. About 40 percent of workers do not pay income tax at the moment, which is in contrast to the principle of “broader tax revenue sources and lower tax rates.” With the new tax rate increase, South Korea’s actual maximum income tax rate, including local income tax, will go up to 49.5 percent. This puts the country’s income tax rate in the seventh rank – a lot higher than the U.S., the U.K., Germany, and Italy – among the OECD member countries with per capita income of over 30,000 dollars and populations over 50 million.
In particular, the income tax increase plan was included at the last minute upon the ruling party’s request. It seems like the party ordered a tax system revision to strengthen the structure of “those who have vs. those who don’t” as their approval ratings plummeted due to the failed real estate policies. There have been many administrations in the past that changed the tax system for political reasons, however, no administration has been this blatant in doing so with such an ideological intention. Political logic is breaking the tax system’s balance.