The Democratic Party will introduce an income tax inflation indexing system and push for amendments to adjust the tax brackets and rates. This is intended to reduce the tax burden on wage earners, as real wages have decreased due to rising prices. The significant increase in earned income tax revenue, now comparable to corporate tax revenue, also serves as a backdrop. If deductions are raised, the estimated revenue shortfall over the next five years is about 2 trillion won. However, no fiscal measures have been presented. Academics have pointed out that tax cut competition should be stopped considering the deficit.
On the 6th, the Democratic Party held a forum on the topic of 'rationalizing the taxation of earned income' at the National Assembly. Representative Im Gwang-hyun, the party's policy committee vice chairman, presided, and Democratic Party lawmakers from the National Assembly's Planning and Finance Committee co-hosted. Officials from the Democratic Research Institute, the party's think tank, also attended. Since Representative Lee Jae-myung has already mentioned reforming income tax, it is effectively being pursued as a party line.
At this meeting, it was suggested to reflect the 40% increase in the price index over the past 15 years by raising the basic deduction from the current 1.5 million won to 1.8 million won, adjusting the 6-15% tax bracket, where the 6% range would increase from 14 million won to 15 million won, and the 15% range from 50 million won to 53 million won. It was also suggested to increase the non-taxable amount for meal expenses from 200,000 won to 300,000 won. The annual fiscal requirement is estimated at 2.7 trillion won for adjusting tax brackets and 420 billion won for meal expense adjustments.
Chae Eun-dong, a researcher at the Democratic Research Institute, said, "As income increases, the number of individuals eligible for the basic deduction increases, and the benefits vary according to the applicable tax rate," noting that it is more favorable for larger families and higher incomes. Additionally, it was suggested to apply the income deduction for sports facility usage as a tax credit. A new tax credit would be established, setting the deduction rate at 5% with an annual deduction limit of 300,000 won.
◇"South Korea's income tax burden rate is low, and we need to consider the revenue shortfall"
On the other hand, there are claims that the introduction of the inflation indexing system is premature. The low income tax burden rate in South Korea compared to major countries and the ongoing revenue shortfall must be considered. Using the example of the British Conservative Party, it was pointed out that pushing for tax cuts without fiscal measures could lead to backlash.
According to OECD data presented by Professor Kim Hyun-dong, South Korea's tax burden ratio as of 2022 is 23.8%, lower than the OECD average of 25.3%. The following year, the South Korean tax burden ratio fell further to 19.0%. The ratio of income tax to nominal GDP also showed that South Korea (6.6%) is lower than the OECD average (8.2%). Among the 38 OECD countries, 22 have implemented income tax inflation indexing.
Professor Kim said, "With three consecutive years of revenue shortfall, the economic growth rate has been continuously adjusted downward," noting that there is a need to be more cautious about income tax reform for tax cuts. Mentioning the case of former British Prime Minister Liz Truss, who fell from power after 49 days due to tax cut controversies, he remarked that "without a concrete blueprint for how to address national liabilities, negative feedback from citizens is likely to arise."
Researcher Im Jae-beom of the National Assembly Legislative Research Service also noted, "We can consider introducing the inflation indexing system as a way to alleviate the increase in taxpayers' real tax burden in response to rising prices," while cautioning that "the increasing ratio of tax-exempt individuals may undermine vertical equity and reduce the flexibility of fiscal policy due to revenue decline." This indicates that income tax reform may raise the proportion of tax-exempt individuals, leading to equity controversies.
In response, Representative Im Gwang-hyun stated, "The high proportion of tax-exempt individuals in our country indicates that polarization is severe, with many low-wage earners. Rather than simply trying to lower the tax-exempt rate by taxing low-income groups, policies should be implemented to increase income and incorporate them into the taxable base."
◇"Worried about losing the initiative in tax cuts, ruling party moves to abolish spousal inheritance tax"
In the early presidential election phase, the issue of "tax cuts" has emerged as the biggest topic in politics. As the Democratic Party pushes for inheritance tax cuts and reforming earned income tax, the People Power Party has proposed abolishing the spousal inheritance tax altogether. This is due to significant internal criticism that they have lost policy leadership to the Democratic Party. Both ruling and opposition parties believe that they can attract the politically moderate middle class through tax cuts.
The Democratic Party decided to designate a bill to raise the current blanket deduction of 500 million won for inheritance tax and spousal deductions to 800 million won and 1 billion won, respectively, as an expedited processing bill (fast track). The People Power Party has taken the stance of not only increasing the deductions but also lowering the top tax rate from 50% to 40%, and abolishing the valuation premium for major shareholders.