Outdated tax brackets squeeze Korea’s middle class

Office workers in South Korea paid a record 68.4 trillion won, or about $51 billion, in earned income tax last year. Despite an economic slowdown, revenue from the tax rose 12.1 percent from a year earlier, approaching 70 trillion won. Salaried employees, often described as having “glass wallets” because their income is fully visible to tax authorities, now account for 18.3 percent of total national tax revenue.

Revenue from earned income tax typically rises due to an increase in taxpayers or higher wages. Over the past decade, however, the growth in the number of taxpayers has accounted for only about one-quarter of the overall increase in revenue. This suggests that nominal wage growth and an outdated tax system, rather than a larger taxpayer base, are the main drivers of the heavier burden.

Tax rates differ by income bracket. As wages rise, workers can move into higher brackets, where higher rates apply. The progressive system further amplifies the burden. In 2023, high-income earners with total annual pay exceeding 80 million won made up 12.1 percent of all workers but paid 76.4 percent of total earned income tax.

A key issue is the so-called inflation tax effect, in which tax revenue grows as nominal wages increase while tax thresholds remain fixed. As wages rise, more middle-income earners are drawn into higher brackets. The earned income tax base was last broadly adjusted in 2008. In 2023, only the lowest brackets, subject to 6 percent and 15 percent rates, were slightly revised, while the higher brackets taxed at 35 percent to 45 percent remained unchanged. The number of high-income earners subject to these top rates rose at an average annual rate of 10.5 percent over the decade through 2023. It is little surprise that some office workers complain that promotions or bonuses seem to benefit the government more than themselves.

Over the past 10 years, earned income tax revenue has surged 152.4 percent, more than twice the growth rate of total national tax revenue. To ease the inflation tax effect, policymakers may need to consider raising the current 1.5 million won basic deduction for earned income or introducing a system that links tax brackets to consumer price inflation. If the burden continues to increase at the current pace, dissatisfaction among salaried workers who view themselves as uniquely exposed to taxation is likely to intensify.