Threshold for highest tax rate to be lowered

The number of high incomers who should pay the highest rate of income tax (38 percent) will increase by 70,000 to 100,000 from next year. The ruling and opposition parties have reached an agreement in principal that they will adjust the tax base (standard of income streams subject to taxation) for an indirect tax hike.

If the tax revision bill is passed at the National Assembly by the end of this year as per the agreement, it would mark the first tax hike for the rich since the inauguration of President Park Geun-hye. In fact, raising taxes for the rich was one of the president’s campaign pledges.

According to the National Assembly and the Ministry of Strategy and Finance, the taxation subcommittee of the parliamentary finance committee reached a consensus on Sunday that the bar for the highest tax rate should be lowered from ‘over 300 million won’ to ‘over 150 million won’ or ‘over 200 million won.’ While the main opposition Democratic Party supports the ‘150 million won’ bill proposed by Lee Yong-sup, the ruling Saenuri Party supports the ‘200 million won’ bill proposed by Rep. Na Seong-lin. Despite the difference, both parties voice in unison that the threshold should be lowered.

The government has opposed to adjusting the tax base on the grounds that a tax hike for high incomers may aggravate consumer sentiment and as a result affect the domestic consumption. However, many of the government’s measures to reduce non-taxation and tax credits had to move back after deliberation at the National Assembly, so the total tax revenue originally planned decreased by about 300 billion won. Reportedly, the government has changed its position to make up the shortage.

The Ministry of Strategy and Finance estimates that if the highest tax rate is applied to those who earn more than 150 million won a year, the tax revenue will increase by 300 to 350 billion won a year and about 100,000 people will see their income tax increase. If the threshold is lowered to ‘over 200 million won,’ the annual tax revenue will increase by 150 to 200 billion won and 70,000 people will have to pay more income taxes.

An employee who earns 300 million won a year currently pays 90 million won for income tax (based on calculated tax amount, excluding deductions). But if the bar is lowered to 150 million won, he has to pay 5 million won more a year.

The government reluctantly accepted the adjustment of tax base because a tax hike this way is more acceptable than a direct tax increase such as raising tax rates from the people’s perspective. If the bill is passed, it will become a tax revision in two years after Korea introduced the Korean version of “Buffett Tax” in 2011 by raising the highest tax rate to 38 percent for those who make more than 300 million won a year.

The ruling and oppositions parties are also discussing a plan to raise the minimum tax rate (the minimum amount of tax that a company has to pay even after deductions) applied to large companies making more than 100 billion won by 1 percentage point from 16 percent to 17 percent. The minimum tax rate for corporates increased from 14 percent to 16 percent only a year ago. If this is legislated, it will pose a big burden to businesses.