‘1 billion won per child.’ In February of last year, Booyoung Group drew attention by providing employees with an extraordinary childbirth incentive. As the company disbursed the lump sum of 1 billion won, tax issues also emerged. If the childbirth support money is considered as salary, the taxes employees would owe are nearly 40 million won.
To alleviate the tax burden on employees, Booyoung Group considered the option of giving the childbirth support money as a gift rather than as salary. However, if the childbirth support is given as a gift, it would complicate the company’s cost management, increasing the company’s tax burden.
Critics pointed out that the bold decision by corporations to increase birth rates was, rather than being aided by the tax system, obstructed by it. The government began working on solutions, stating a month later that it would make the entire childbirth support amount tax-exempt.
The government is continuing its tax reform efforts to tackle the low birth rate problem. From 2024 to 2026, it established a ‘marriage tax credit’ which grants a maximum tax credit of 1 million won to couples registering their marriages. Additionally, the tax credit for each child was raised by 100,000 won. While this may not seem like a large sum to encourage marriage and childbirth, it was a declarative tax reform aimed at actively assisting families with the costs of childbirth and child-rearing.
The family-friendly tax reform plan received positive evaluations. This tax reform won the top prize in the ‘2024 Ministry of Strategy and Finance Policy MVP’ chosen by the public at the end of last year. On the 15th, Jo Man-hee, Director General of Income Corporate Tax Policy at the Ministry of Strategy and Finance, and Lee Young-joo, Director of the Taxation Division at the Ministry, met with ChosunBiz and noted, “We created this tax reform plan linking marriage, childbirth, and child-rearing by considering the cultural characteristics of Korea.”
The following is a Q&A session.
―I’m curious about the background behind the decision to make the childbirth support fund completely tax-exempt.
Director General Jo Man-hee (hereafter referred to as Director Jo) said, “The push for a complete tax exemption for the childbirth support fund was greatly influenced by Booyoung Group. There was considerable discussion about how much of the 1 billion won should be tax-exempt.”
Offering 1 billion won as a childbirth support fund indicates that corporations are stepping up to assist in resolving the low birth rate issue. Given this intention, I concluded that it was appropriate to make the entire amount tax-exempt.
If the government were to set a tax-exempt limit at 10 million won, I thought corporations might interpret it as a message saying, ‘Provide 10 million won for childbirth support.’
―Why was the marriage tax credit amount set at 1 million won?
Director Jo said, “We based it on the costs associated with wedding preparations. Statistics show that the average cost for the wedding package (studio, dress, makeup) is around 3 million won. I thought if the government provides 1 million won, then the bride and groom could each contribute 1 million won.”
―Were there any foreign systems benchmarked when formulating tax policies to overcome the low birth rate?
Director Lee Young-joo (hereafter referred to as Director Lee) stated, “We didn’t specifically reference foreign systems, but there was a noticeable one. It’s the French ‘equivalent of N raised to the power of N’ tax system, where the family’s total income is divided by the number of family members to calculate per capita income tax. The more family members there are, the lower the tax burden.”
Abroad, many countries primarily operate tax credit systems related to children. Considering the culture in Korea, where marriage and childbirth are often linked, we created a distinctive policy called the marriage tax credit. Unlike other countries where having children is often done without marriage, overwhelmingly large portions of births in Korea occur within wedlock.
―What do you think are the reasons for the popularity of this policy?
Director Jo noted, “This is the first tax policy that examines all stages, from marriage to childbirth to child-rearing. There was considerable interest from the public. I realized that everyone in the nation empathizes with the seriousness of the low birth rate issue.”
There was much feedback regarding the policy. For instance, as it was announced that a marriage tax credit would be granted starting January 2025, an engaged woman remarked that she would delay her marriage registration. I thought it might distort marriage registration statistics, so we decided to apply it retroactively from January 2024 to prevent any distortion.
―Some point out that the tax gap between single households and households with children is smaller (5%p) compared to the OECD member country average (10.2%p).
Director Jo mentioned, “As of 2022, personal income tax accounted for 28.6% of our country's total tax revenue, which is low compared to the OECD average (31.8%). The share of tax-exempt individuals is high, and with various deductions, the income tax base is relatively weak.”
However, this year, I expect the tax gap between single households and households with children to approach the OECD average. This is due to the implementation of the marriage-child-rearing trio tax policies this year, as well as the expansion of eligible recipients for the child allowance, which provides 1 million won per child.
―Are there any plans to reduce the proportion of tax-exempt individuals or introduce a single tax?
Director Jo responded, “Domestic tax-exempt individuals are primarily low-income individuals. It is difficult to increase their tax burden. The same goes for a single tax. We need to enable a positive approach towards marriage, childbirth, and child-rearing. It’s inappropriate to approach it negatively with punitive measures like ‘You live alone, so pay more taxes.’ There are cases where individuals cannot marry due to unfavorable conditions, and it would be socially unacceptable.”
―When raising children, the biggest concern is 'childcare.' Are there any plans to expand tax credits for the childcare sector?
Director Lee stated, “I know that many families use childcare helpers. However, this is mostly personal transactions, making verification difficult. Without verification, the government also faces challenges in determining whether those expenses have been used appropriately. I believe it is better to utilize the subsidies provided by the state and the existing childcare system.”
―The personal deduction amount for children has remained unchanged since 2009. Many see the need for an increase.
Director Lee replied, “Considering the inflation rate, many believe this should be increased. However, we need to consider the overall aspects of the tax system. The credit card deduction has been expanded, and special deductions have continued to rise, resulting in challenges in increasing personal deductions.”
―Some point out that this policy, which induces tax cuts, conflicts with sound fiscal policy. What is your opinion on this?
Director Jo noted, “When various deductions arise, there is a tendency to weaken the tax revenue base. However, if this leads to increased marriage and childbirth, it will lay the foundation for economic revitalization. From the government’s perspective, it is an ‘investment.’ The low birth rate issue is a critical problem that must be resolved.”
―Do you feel the effects of the policy?
Director Lee stated, “I think it is still too early to feel the effects of the policy. However, I believe many corporations have begun to take an interest in childbirth support funds due to this tax law amendment. The public may also have begun to view childbirth support funds more positively. We will continue to monitor whether there is a change in the social atmosphere regarding childbirth and child-rearing. Additionally, we will examine whether there are more people to support and what other policies can be introduced.”
―What areas do you think need further improvement to overcome the low birth rate?
Director Jo responded, “I believe the biggest issue is work-life balance. The environment must be improved to allow for a better balance between work and family life. Financially reducing the burden of child-rearing through budgets for child allowances is also important. Most importantly, structural issues such as the rising housing costs and education challenges due to the concentration in the metropolitan area must be resolved.”
―What policies will be pursued in the future?
Director Jo stated, “We plan to implement policies that provide tax benefits to corporations that create family-friendly work environments. There will be tax support for companies that improve working conditions, such as flexible work hours, four-day work weeks, etc. The Ministry of Employment and Labor is establishing a certification system related to these working conditions, while the Ministry of Strategy and Finance is preparing to offer tax benefits for companies that receive this certification.”