A proposal called for converting "earmarked taxes," whose uses are fixed, such as the education tax and The Special Tax for Rural Development, into general funds to expand social welfare expenditure. It also raised the need to increase the effective tax rate for upper-middle income brackets.
The National Assembly Budget Office said in a report released on the 28th, titled "Tasks for improving tax policy to enhance social inclusiveness," that "structural improvements across tax policy are needed to strengthen social inclusiveness."
The office identified wage gaps and the limited income redistribution effect as major causes of income inequality in Korea.
According to the office, Korea's pre- and post-tax Gini coefficient improvement rate was 18.2%, the fourth lowest among 37 countries in the Organisation for Economic Co-operation and Development (OECD) with available data, after Mexico (3.8%), Chile (8.7%), and Costa Rica (12.1%). Compared with higher-ranking Belgium (48.0%) and Finland (47.2%), it was less than half. This means income redistribution policies are not sufficiently easing inequality.
The office pointed to a low effective income tax rate as the cause. As of 2022, Korea's top marginal personal income tax rate was 45%, the sixth highest in the OECD, but the effective rate reflecting various deductions and exemptions was only 5.2%, dropping to 30th.
The office said, "To secure an appropriate share of income tax, raising the effective tax rate for upper-middle income brackets is inevitable," and noted, "A comprehensive taxation system for investment income from financial assets such as stocks and bonds must be established." This effectively means that the reintroduction of the financial investment income tax should be considered.
Regarding corporate taxation, it said, "It is necessary to examine whether excessive tax benefits for small and medium-sized enterprises could undermine incentives for corporations to grow." On property taxation, it suggested, "It is necessary to consider not only real estate but also financial assets comprehensively."
On consumption taxes, it added that "sectors where high-income earners mainly benefit or where the rationale for exemptions has weakened due to environmental changes need adjustment," citing private education, finance and insurance, and for-profit artworks as examples.
It also raised the need to convert earmarked taxes such as the education tax and The Special Tax for Rural Development into general funds. The office said, "While boosting tax revenue is important, there are limits to tax increases," and added, "We should consider converting earmarked taxes whose original purposes have been achieved but were extended, or whose expenditure priorities have declined due to economic and social changes, into general funds to be used to expand social welfare expenditure."