Korea’s tax burden rate is assessed as lower than the average of the Organisation for Economic Co-operation and Development (OECD). However, the tax burden perceived by citizens may feel different. Are Koreans really paying high taxes? We will examine this through the meaning of the tax burden rate and international comparisons.
National Budget, Taxes, and the National Economy
Reviewing the government budget for the following year, decided annually at year-end, reveals how the government and National Assembly assess the national economy’s performance over the past year and the economic outlook for the coming year. Just as a household cannot spend freely when income decreases, neither can the state. Of course, the government sometimes increases the budget beyond normal levels to prevent an expected economic downturn, but fundamentally, a solid tax revenue base is required to expand the budget.
Long ago, in September 2018, South Korea’s Ministry of Economy and Finance, responsible for national finances, announced a massive plan to spend 470.5 trillion won on the government budget for the following year. Compared to the 2018 government budget, this represented a 9.7% increase. This growth rate was comparable to the 10.6% increase in the 2009 government budget, which was necessary to inject large-scale government funds to prevent an economic downturn caused by the global financial crisis. The reason the government submitted such a large budget proposal to the National Assembly was its judgment that extraordinary measures were needed to create jobs and restart the engine of economic growth. Above all, the prediction that it could collect even more tax revenue than the significantly increased budget supported the large-scale budget proposal.
In this blog post, we will examine how much tax Korean workers and individuals pay, based on the 2019 budget proposal announced by the government and data released by the National Assembly Budget Office and the OECD (Organization for Economic Cooperation and Development). How could government tax revenue increase significantly when over 40% of all wage earners pay no income tax at all?
Tax Burden Rate and the Level of Tax Burden on Citizens
Without taxes, a nation cannot function. Without citizens paying taxes, the state cannot pay the salaries of public officials and soldiers, nor can it properly fulfill its essential functions like national defense, diplomacy, and public safety. History shows that tax issues were often at the heart of major revolutions, wars, and independence movements. The United States, then a British colony, decided to seek independence from Britain precisely because the British government and Parliament sought to impose colonial taxes like the Sugar Act and Stamp Act. The United States resolved to seek independence when Britain sought to increase taxes while denying its representatives a seat in Parliament. The representatives of the 13 American colonies began the Revolutionary War with the slogan, “No taxation without representation.” As seen in historical examples, imposing taxes fairly is paramount for maintaining a stable nation. Imposing taxes unfairly risks discontent among the people, who may rise up at any time.
Trend of Tax Burden Rate
The tax burden rate is a statistical measure used internationally to show how much tax burden a nation’s citizens bear. The tax burden rate provides an immediate understanding of the proportion of taxes within GDP. It is calculated by dividing the total amount of taxes paid by citizens and businesses over a year—the sum of national and local taxes—by nominal GDP. On August 5, 2018, the Ministry of Economy and Finance announced that Korea’s 2018 tax burden rate was projected to be 20.2%. Total tax revenue for 2018 was estimated to reach 365 trillion won, a 5.5% increase from the previous year. However, hearing only this figure and thinking, ‘So South Koreans pay 20.2% of their annual salary directly as taxes,’ is incorrect. This is because the national taxes included in the denominator of the tax burden rate encompass not only individual taxes but also corporate taxes paid by businesses. One should not assume that the exact percentage shown in the tax burden rate is deducted directly from personal income.
A similar statistic to the tax burden rate is the national burden rate. To calculate the national burden rate, the government’s annual national and local tax revenues are combined with citizens’ contributions to the four major social insurance premiums and social security funds, then divided by nominal GDP. While the tax burden rate only adds national and local tax revenues, the national burden rate includes the four major insurance premiums and social security fund contributions, which effectively have quasi-tax characteristics. Therefore, its share of GDP inevitably becomes larger than the tax burden rate. According to data released by the Ministry of Economy and Finance in August 2018, South Korea’s national burden rate was projected to reach 26.6% in 2018.
Earlier, it was mentioned that the government’s national tax revenue was expected to increase significantly in 2018, which means the tax burden rate rose. Statistics Korea data confirms a trend of continuously rising tax burden rates in recent years. The tax burden rate, which was 17.9% in 2013, rose to 18% in 2014, 18.5% in 2015, and 19.4% in 2016. In 2017, it reached 19.9%. A significant number of economic experts estimated that the excess tax revenue collected during 2018 alone would exceed 20 trillion won. Excess tax revenue refers to tax income collected above the amount originally projected when drafting the government budget for that year.
However, the Ministry of Economy and Finance has expressed caution regarding the tax burden rate exceeding 20%. The reason is that the number ‘20’ carries symbolic significance. During the October 2017 parliamentary audit, Kim Dong-yeon, then Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, stated, “Exceeding a 20% tax burden rate requires consideration of factors like national consensus.” This implies that the tax burden rate, as a figure revealing the weight of taxes borne by citizens and businesses and the level of welfare they can enjoy through it, is not an issue the government can decide unilaterally. Taxation is a matter that must be determined through broad social discussion involving not only the political sphere but also the public.
The emerging issue of income tax exemption for earned income
Before deciding whether to raise the tax burden rate, there is one crucial point that must be addressed. Let me pose a question. Many readers of this article are likely salaried workers employed by companies. So, what percentage of South Korea’s salaried workers, i.e., those with earned income, pay zero income tax?
When asked this question, many might think, ‘If you work for a company and receive a salary, everyone pays income tax. What are you talking about?’ However, according to the Ministry of Economy and Finance, as of 2016, the proportion of Korean workers who paid zero won in income tax – that is, the proportion of income tax-exempt earners – reached 43.6%. The proportion of income tax-exempt workers, which was 32.2% in 2013, surged to 47.9% in 2014 and has remained in the 40% range for several years, at 46.5% in 2015 and 43.6% in 2016.
One might wonder, ‘If income tax is automatically deducted from your paycheck, how can so many people not pay taxes?’ The high proportion of income tax-exempt individuals is due to tax credits. Even if they initially paid taxes, considering the amount refunded through various tax credits during the year-end tax settlement, over 40% of salaried workers effectively pay no income tax. Experts explain that the tax exemption rate rose significantly after the special deduction system for earned income shifted from income deductions to tax credits starting in 2014.
Some view it as problematic that nearly half of salaried workers pay zero earned income tax. This violates the fundamental principle of income tax: taxes should be levied where income exists. Furthermore, the concentration of income tax burdens on specific groups has weakened the principle of universal taxation, where all citizens should pay taxes. The fact that nearly half of wage earners pay no taxes raises concerns about fairness. To participate as sovereign citizens in national decision-making, the costs associated with that decision-making should be borne equitably according to ability, but this is not currently being achieved. Furthermore, as South Korea faces worsening low birth rates and an aging population, strengthening income tax—which can broadly collect revenue—is essential to cover rising welfare costs. Many argue that to enjoy welfare systems comparable to advanced nations, citizens must bear tax burdens commensurate with those in developed countries. Without resolving the labor income tax exemption issue, raising welfare standards will be practically impossible.
As the income tax exemption rate became excessively high, legislation to reduce it was proposed in the National Assembly. In 2017, Lee Jong-gu, then a lawmaker from the Bareun Party, proposed a bill requiring workers earning over 20 million won annually to pay at least 10,000 won per month in income tax after receiving tax credits, amounting to about 120,000 won per year. However, it did not pass. There is nothing voters dislike more than raising taxes that were previously cut.
Experts unanimously point out that for Korean society to establish a welfare system based on the ‘moderate burden, moderate welfare’ model, it must first reduce the excessively high labor income tax exemption rate compared to major advanced nations. This is because rights and benefits can only follow when responsibility is upheld. Comparing with OECD member countries confirms that Korea’s tax burden rate is low. Analyzing 2015 data, the most recent year with comparable statistics across all member countries, Korea recorded a tax burden rate of 18.5%. This ranked 33rd out of 35 countries. This falls short of the OECD average of 25%. Denmark ranked first at 45.8%, Sweden second at 33.6%, Iceland third at 33.1%, New Zealand fourth at 33%, and Finland fifth at 31.2%.
When comparing based on the national burden rate, Korea also ranked 31st. It is clear that Korea’s tax burden rate is indeed lower compared to other OECD member countries. Of course, in Korea’s case, there are many quasi-tax burdens that are not statistically counted as taxes, and some viewpoints suggest that if these were fully reflected, the tax burden rate would actually be higher.
Returning to the main point, ultimately, in 2018, the government is expected to collect 20 trillion won more in national tax revenue than initially anticipated. However, this is not solely due to the income tax paid by ordinary salaried workers. The significant increase in tax revenue stems primarily from substantial growth in corporate and income taxes. Corporate tax revenue collected from January to July 2018 reached 42.5 trillion won, an increase of 7.7 trillion won compared to the same period a year earlier. Income tax also rose significantly during the same period, reaching 51.5 trillion won, an increase of 6.9 trillion won compared to the same period a year earlier. The substantial increase in corporate tax is attributed to strong exports, particularly in the semiconductor sector. The rise in income tax appears to be due to higher real estate prices, which increased capital gains tax revenue.
