Lee Hyung-il, Vice Minister of the Ministry of Economy and Finance, emphasized that "the revenue base of our economy has sharply weakened over the past three years, and the tax burden ratio has also significantly decreased," adding that "it is necessary to normalize the weakened revenue base."
During a pre-briefing on the 2025 tax reform plan held at the government office in Sejong on the 29th, the Vice Minister noted that "we will operate the tax system according to the principle of ability to pay and will only support tax expenditures as needed."
The Ministry of Economy and Finance has decided to raise the tax rates across all corporate tax brackets by 1 percentage point and to increase the securities transaction tax rate from the current 0.15% to 0.2%. This effectively reverses major tax cut policies promoted during the Yoon Suk-yeol administration.
The Vice Minister explained, "We will expand the revenue base and increase investment in super innovative technology sectors to create a virtuous cycle between economic growth, revenue increase, and fiscal sustainability."
In response to criticisms that a lack of consistency in tax policy has led to low predictability, he replied, "While predictability is important, it is also the role of the Ministry of Economy and Finance to adjust policies to fit the changed economic conditions."
The following is a Q&A with Lee Hyung-il, Vice Minister of the Ministry of Economy and Finance, and Park Geum-cheol, head of the taxation department.
—The tax policies promoted by the Yoon Suk-yeol administration have been largely reversed after three years. Isn't the tax stability excessively low? Please speak from the taxpayer's perspective.
Lee Hyung-il, the Vice Minister said, "Stability in tax policy is important for the predictability of taxpayers. However, it is also our job to reasonably adjust the system to match changing circumstances. The recent global competitive environment, including the AI transition, has changed and there are new fiscal needs that have arisen. Maintaining the current system is not easy. We will implement 'performance-based fiscal management' by supporting necessary areas with the resources established through normalizing the revenue base."
—You emphasized 'expanding the revenue base,' but the actual effect on increasing tax revenues seems limited. There has been almost no adjustment to tax expenditures.
The Vice Minister stated, "The revenue effect expected from this tax reform over the next five years is estimated at about 8.1672 trillion won based on an incremental basis compared to the previous year. Cumulatively, it is expected to expand the revenue base to 35 trillion won over the same period."
Adjusting tax expenditures was a very difficult task. The reduction in tax expenditures is estimated at about 4.6 trillion won over the next five years, which is still a significant scale compared to the average value over the last five years.
Currently, most of the exemptions and reductions target the lower class, middle class, and investments. Tax deductions such as credit card income deductions and special tax reductions for small and medium-sized enterprises are set to expire this year, but it has been difficult to abolish them considering their impact on the lower class and small businesses."
—By raising the corporate tax rate (1%p) that was lowered by the Yoon Suk-yeol administration, do you consider this a normalization of tax burdens? Does this imply that 'the previous administration's corporate tax cut was abnormal' or that 'the judgment of lowering corporate taxes was a mistake'?
The Vice Minister said, "The decrease in corporate tax revenues over the past two years is attributed to a combination of economic slowdown and the reduction in corporate tax rates. In fact, the tax burden ratio decreased from 22.1% in 2022 to 17.6% in 2024."
The previous administration seemed to expect that increasing economic vitality through corporate tax cuts would lead to increasing tax revenues. However, considering the recent economic situation and the trend of declining tax revenues, it is difficult to see that the policy had any substantive effect.
—President Lee Jae-myung emphasized that 'the economy thrives when corporations thrive.' Nevertheless, is it true that the decision to revert the corporate tax rate shows that strengthening the revenue base is viewed as more important?
The Vice Minister said, "The resources secured through the increase in corporate taxes will be used to support our industries in developing AI and other super innovative technologies in a global competitive environment. They may also be used to prepare financial, fiscal, and tax packages needed for regulatory reform. We plan to focus on fundamental strengthening of industrial competitiveness, including AI-based process innovation in the automobile and steel industries, and expanding research and development (R&D) investments. Please consider the new government's economic policy direction and next year's budget comprehensively."
—What is the reason for not reducing the corporate tax brackets? It is generally typical globally to operate corporate tax rates as single or two-tier rates, while Korea is divided into four tiers.
Park Geum-cheol, head of the taxation department said, "It is true that there are criticisms that Korea's corporate tax system is overly complicated with four tiers. However, since this system has historical significance, it is difficult to change it abruptly. If we adjust the tax brackets, it can create benefits or disadvantages based on corporate size, so we have considered various aspects comprehensively."
—Why is it that only the upper tax brackets were not increased?
Park Geum-cheol commented that "while it is true that the tax burden has increased due to the 1 percentage point increase in the corporate tax rate, there are compensatory systems such as the extension of special tax reductions for small and medium-sized enterprises, so it is necessary to assess everything overall. Currently, there are over 1 million corporate entities for small and medium-sized enterprises, but only about 400,000 of them actually pay taxes. While individual tax burdens may have increased, on average, the increase in tax per corporation is judged to be at a manageable level."
—If the securities transaction tax rate is raised back to the level of 2023, and the capital gains tax threshold for major shareholders is lowered from 5 billion won to 1 billion won, won't that put a burden on the stock market?
Park Geum-cheol responded, "The securities transaction tax rate and major shareholder criteria are the results of considering the rationalization and fairness of the tax system. The securities transaction tax rate was originally intended to be gradually reduced, based on the introduction of the financial investment income tax, but was reverted to the 2023 level after the financial investment tax was abolished in January this year."
The major shareholder criterion was relaxed in response to the concern that "sales are concentrated at the end of the year due to this system," but after that, net sales actually increased, leading to a reinstitution of the criteria (to 1 billion won).
In the past, there have been changes to the securities transaction tax rate and major shareholder requirements, but the impact on the stock market was limited. There have also been instances where the stock market moved contrary to expectations.
The government is also preparing various systems to revitalize the stock market and capital market. Separate taxation on dividend income will increase corporate dividends and could also help alleviate the Korea Discount.
In addition to tax laws, plans for improving systems to enhance transparency in the stock market and protect investors are being prepared. If investments are activated with the resources collected from tax law amendments, corporate value will increase, and there could be indirect benefits for the stock market as well."
—Is the goal to restore the securities transaction tax rate to its original state (0.35%) under the securities transaction tax law? What is the reason for reverting to the level of 2023?
Park Geum-cheol said, "Currently, we are not considering raising the securities transaction tax rate to 0.35% at all. Raising the securities transaction tax rate may not be a positive factor for the stock market, so we have been thinking carefully about how much to raise it."
—It is more advantageous for short-term investors if the securities transaction tax is low. Is the increase in securities transaction tax a policy aimed at encouraging long-term investment?
Park Geum-cheol said, "While it is not a direct policy goal, it is something that could be interpreted in that way."
—What are the revenue effects of separate taxation on dividend income and the number of target corporations?
Park Geum-cheol stated, "The revenue decrease effect is expected to exceed 200 billion won. However, the purpose of separate taxation on dividend income is not to benefit controlling shareholders but to encourage the expansion of dividends among listed companies. It is expected that about 350 out of approximately 2,500 listed companies will be subject to this system."
—Can we assume that there will be no reforms to the comprehensive real estate tax under the Lee Jae-myung administration?
Park Geum-cheol stated, "Real estate is a sensitive policy area. The government recently announced lending policies in the financial sector and is also said to be reviewing the expansion of real estate supply. We need to observe the implementation results and effectiveness of the policies, and I cannot definitively state the policy direction now, as it may change in 2-3 years."
—When proposing tax amendments last year, provisions for converting inheritance tax to estate acquisition tax were included, but it fell through. Is there a plan to continue pursuing this?
The Vice Minister stated, "The conversion to estate acquisition tax is currently submitted to the National Assembly as a government proposal and will be discussed there in the future. While it is expected to improve equity in the tax burden among heirs, there are concerns about a large-scale decrease in tax revenues and benefits being concentrated on high-asset individuals. The government will consider various opinions from different sectors during the National Assembly's discussions and will determine the direction of the initiative based on fiscal conditions and beneficiaries."