The curtain rises on a ruling-opposition "tax war" over the Lee Jae-myung administration's first tax code revision. Starting on the 10th, the National Assembly is set to enter a fierce tug-of-war over key issues including the education tax, corporate tax, and separate taxation of dividend income.
The Strategy and Finance Committee will hold a forum on the 10th to discuss the direction of deliberations on the tax revision bill, then activate the subcommittee on taxes from the 13th to begin full-scale reviews. The tax subcommittee, the first gateway for reviewing tax code changes, plans to handle about 500 items, including the government plan. Ruling party secretary Chung Tae-ho of the committee said in a call, "There are currently about 500 bills introduced, including the government's," adding, "We will sort them by issue and deliberate."
◇ Education tax rate doubled… strengthening education competitiveness vs deviating from the purpose tax
In this tax review, the plan to raise the education tax is expected to be a hot issue. The education tax is a purpose tax collected to expand educational facilities and improve teacher treatment, and financial companies such as banks and insurers pay 0.5% of revenue as an education tax.
Starting next year, the government decided to double the education tax rate to 1.0% for financial firms with operating revenue of 1 trillion won or more. The government says stable funding is needed for future education investments such as expanding education infrastructure for the age of artificial intelligence (AI) and improving teacher treatment. It says it is difficult to cover surging education expenses with the current rate, which has been fixed for 45 years since its introduction in 1981. There is also a view that the financial sector, which earned huge profits during a period of rising interest rates, should bear greater social responsibility. The Democratic Party supports the government plan, emphasizing "strengthening national competitiveness through investment in education."
The People Power Party questions the need for a hike, saying the local education grant-in-aid (earmarked tax) funded by the education tax has posted surpluses every year as the school-age population declines, and its use is limited to elementary, middle, and high school education. It especially worries that raising the education tax could lead to higher financing costs and be passed on to consumers.
People Power Party lawmaker Park Soo-young recently introduced a bill to cut the "education tax," proposing to lower the rate to 0.3% for financial firms with annual revenue of 1 trillion won or less, and to 0.5% for the portion exceeding that. It is a counter to the government plan. Park said in a call, "The education tax is a purpose tax, and banks have no direct connection to the education tax."
◇ Expanding inheritance tax deductions vs easing the tax burden
The tax subcommittee is also set to discuss a plan pledged by President Lee Jae-myung during the presidential race to raise the cap on inheritance tax deductions (80 million won for the basic deduction and 1 billion won for the spousal deduction, totaling 1.8 billion won). At a Sept. 9 press conference marking 100 days in office, Lee noted, "Shouldn't we revise it in this regular session?" signaling his intent to push ahead.
Within the ruling party, there is also movement to consider a compromise by expanding the "cohabiting home inheritance deduction," mindful of controversy over a "tax cut for the rich." Under the current system, in addition to a 500 million won basic deduction and a spousal deduction (minimum 500 million won, maximum 3 billion won), a child who inherits a single household's single home after living with a parent for 10 years or more can receive up to an additional 600 million won deduction. On top of this, Democratic Party lawmakers Park Hong-keun (10 years or more, up to 900 million won) and Ahn Do-geol (8 years or more, up to 800 million won) recently introduced separate amendments to the Inheritance Tax and Gift Tax Act to grant additional deductions to spouses who cohabited for a certain period.
The People Power Party, on the other hand, says the inheritance tax burden itself should be drastically lowered. People Power Party lawmaker Choi Eun-seok proposed cutting the top inheritance and gift tax rate from 50% to 30% and making inherited spousal assets tax-exempt. Park Soo-young also said, "Pledging to deduct inheritance tax up to 1.8 billion won was President Lee's campaign promise," adding, "We need to fight the Democratic Party on this."
◇ Consensus on separate taxation of dividend income… but rate adjustments face headwinds
One area where the ruling and opposition parties have found some common ground is separate taxation of dividend income. Currently, financial income (interest and dividends) exceeding 20 million won a year is subject to comprehensive income tax, but the government proposed taxing dividend income from high-dividend corporations separately from comprehensive income. Under the plan, the separate tax rates would be set by tax base bracket at 14% for up to 20 million won, 20% for up to 300 million won, and 35% for the portion exceeding 300 million won.
On this, the People Power Party says the top rate should be sharply lowered to 25%. Party leader Jang Dong-hyuk previously said, "We will boldly cut the top rate to 25% even for those subject to comprehensive taxation over 20 million won a year."
Opinions within the Democratic Party are split. Lawmakers Lee So-young and Kim Hyun-jung argue the top rate for separate taxation should be cut to 25% to revitalize the capital market. But there is considerable opposition within the party, saying, "Benefits could concentrate on investors in high-dividend corporations, sparking controversy over a 'tax cut for the rich,' and tax revenue could fall." The National Assembly Budget Office also said in a recent report that "the effect of reducing the tax burden on high earners (1.7 trillion won over five years) is expected to occur mainly from separate taxation of dividend income for individual shareholders of high-dividend corporations," viewing the tax cut effect as centered on high-income earners.
Lawmaker Chung Tae-ho said, "Separate taxation of dividend income is an issue that requires coordination between the party and the government." Prime Minister Kim Min-seok also said at the National Assembly Special Committee on Budget & Accounts' comprehensive policy inquiry that, regarding the plan for separate taxation of dividend income, "For now we are maintaining the initial stance, but we will leave it somewhat open, listen to opinions, and settle it within the year," adding, "Given that various views are being presented in the National Assembly, including a cut to 25%, we will closely review the finalized matters and make a judgment."
A clash is also expected over whether to raise the corporate tax rate. The government proposed raising the corporate tax rate by 1 percentage point across all tax base brackets. The government and the ruling party say this "normalizes what was lowered under the Yoon Suk-yeol administration."
The People Power Party argues for cutting corporate taxes, saying the economy is struggling due to issues such as South Korea-U.S. tariff talks and that tax changes that dampen entrepreneurship should be approached cautiously. Lawmakers Kim Sang-hoon, Kim Mi-ae, and Choi Eun-seok each introduced corporate tax cut bills citing reasons such as boosting corporate competitiveness. Park Soo-young also said, "Companies are all struggling now. Is there really a need to raise the corporate tax?"
The statutory review deadline for budget-related bills, including the tax revision bill, is the 30th. A ruling bloc official said, "If the deadline passes, the original government bill is automatically referred to the plenary session, giving the ruling party the initiative over the review."