South Korea’s tax burden is considered to be lower than the Organization for Economic Cooperation and Development (OECD) average. However, the tax burden felt by citizens may be different. Are South Koreans really paying too much in taxes? Let’s take a look at what the tax burden ratio means and how it compares internationally.
National budget, taxes, and the national economy
The government budget for the following year, which is decided at the end of each year, shows how the government and the National Assembly assess the performance of the national economy over the past year and the economic outlook for the coming year. Just like a household, a country can’t afford to spend a lot of money when it’s earning less money. Of course, there are times when government budgets can be stretched further than usual to stave off an anticipated downturn, but they can only do so if they’re backed by solid tax revenues.
A long time ago, in September 2018, South Korea’s Ministry of Strategy and Finance, which is in charge of running the country, announced a huge plan to spend KRW 470.5 trillion on the government budget for the next year. Compared to the 2018 government budget, it was 9.7% larger. This is on par with the government budget increase in 2009 (10.6%), when the government had to inject large amounts of money to stem the economic downturn caused by the global financial crisis. The government’s reasoning for submitting such a large budget increase to the National Assembly was that extraordinary measures were needed to create jobs and revitalize the economic growth engine. The large budget was also supported by the expectation that the government would be able to collect more in taxes than the increased budget.
In this blog post, we’ll take a look at how much South Korean workers and individuals pay in taxes based on the government’s 2019 budget, as well as data from the National Assembly Budget Office and the Organization for Economic Cooperation and Development (OECD). How did the government’s tax revenue increase so much when more than 40 percent of all earners don’t pay any income tax?
Tax burden and how much people pay
Without taxes, a country cannot be sustained. If people don’t pay taxes, government officials and soldiers can’t be paid, and the country can’t afford to do the minimum roles of defense, diplomacy, and policing. Throughout history, many of the most important revolutions, wars, and independence movements have been driven by tax issues. When the United States, a British colony, decided to become independent from Britain, it was because the British government and Parliament wanted to impose colonial taxes like the sugar tax and stamp duty. The United States decided to become independent when the British tried to increase taxes while preventing their representatives from participating in Parliament. Representatives from the 13 American states began the Revolutionary War with the words “No taxation without representation.” As history has shown, taxing people fairly is crucial to keeping a country stable. If you tax unfairly, people will always rise up against you.
Changes in tax burden
The tax burden is an internationally recognized statistic that shows how much a country’s citizens are paying in taxes. The tax burden shows the percentage of GDP that taxes account for at a glance. The tax burden ratio is calculated by dividing the total amount of taxes paid by citizens and businesses, i.e. national and local taxes, by the nominal GDP in a year. On August 5, 2018, the Ministry of Strategy and Finance announced that South Korea’s 2018 tax burden rate is expected to be 20.2%. Total tax revenue in 2018 is expected to reach KRW 365 trillion, up 5.5% from the previous year. However, don’t let this story fool you into thinking that South Koreans pay 20.2% of their salary in taxes. This is because the national income tax, which is the denominator of the tax burden ratio, includes not only taxes paid by individuals but also corporate taxes paid by companies. You shouldn’t assume that the tax burden ratio represents the amount of taxes taken out of a person’s income.
A similar statistic to the tax burden ratio is the national burden ratio. To calculate the tax burden ratio, the national and local taxes collected by the government in a year are added to the premiums paid by people for the four major insurance programs and social security contributions, and the result is divided by nominal GDP. While the tax burden ratio adds only national and local tax revenues, the national tax burden ratio adds premiums for the four major insurances and social security fund contributions, which are quasi-taxes. Therefore, the share of GDP is bound to be larger than the tax burden rate. According to data released by the Ministry of Strategy and Finance in August 2018, South Korea’s tax burden rate was expected to reach 26.6% in 2018.
I mentioned earlier that the government’s national tax revenue is expected to increase significantly in 2018, which means that the tax burden rate will increase. Statistics Korea shows that the tax burden has been rising in recent years. In 2013, the tax burden was 17.9%, in 2014 it was 18%, in 2015 it was 18.5%, and in 2016 it was 19.4%. In 2017, it hit 19.9%. Many economists have estimated that the additional excess tax revenue collected in 2018 could be over KRW 20 trillion. Excess tax revenues are taxes that are collected more than the government initially projected in its budget for the year.
However, the Ministry of Strategy and Finance is cautious about the tax burden rate exceeding 20 percent. This is because the number ’20’ has a symbolic meaning. In October 2017, Kim Dong-yeon, then Deputy Prime Minister and Minister of Economy and Finance, said, “There are things to consider, such as national consensus, when the tax burden rate exceeds 20 percent.” This means that the tax burden rate is not a matter that the government can decide unilaterally, as it reveals the weight of taxes that people and businesses have to bear and the level of welfare they can enjoy. Taxes are a matter of public debate, involving the broader public as well as the political sphere.
The controversial earned income tax exemption
Before we can decide whether or not to increase the tax burden, there’s an issue that needs to be addressed. Let me ask you a question. Many of you reading this article are probably employed. So what percentage of South Korean employees, or earners, don’t pay any income tax?
If you’re asked this question, you might be thinking, “That doesn’t make sense, since everyone who works for a company and gets paid a salary pays income tax. However, according to the Ministry of Strategy and Finance, as of 2016, 43.6% of South Korean workers were exempt from paying income tax, meaning they didn’t pay any income tax. The proportion of those exempt from paying income tax soared to 47.9% in 2014 from 32.2% in 2013, and has remained in the 40% range for several years, with 46.5% and 43.6% in 2015 and 2016, respectively.
You might ask, “How can there be so many people who don’t pay taxes when income tax is automatically deducted from their paychecks? The reason for the high percentage of people who are exempt from paying income tax is because of tax credits. Even if they do pay taxes, more than 40% of working people don’t pay income taxes because they get money back at the end of the year through various tax credits. Since 2014, the special deduction system for earned income has changed from a deduction to a credit, which experts say has significantly increased the tax exemption rate.
Some say it’s a problem that nearly half of working people don’t pay any income tax. This is because it violates the principle of income tax, which is that taxes are paid where income is earned, and the principle of national taxation, which is that all citizens should pay taxes, is weakened by concentrating the burden of income tax on certain classes. Nearly half of all earners do not pay taxes, which is a problem for equity. In order to participate in national decision-making as a sovereign nation, the costs of decision-making should be borne equitably according to ability, which is not currently the case. In addition, Korea needs to strengthen income taxes to collect a broad range of taxes to cover the increasing welfare costs as the country faces a declining birthrate and aging population. There are also many people who believe that if you want to enjoy the welfare system of developed countries, you should pay as much tax as people in developed countries. It would be virtually impossible to increase the level of welfare if the problem of exemptions from earned income tax is not solved.
As the percentage of exemptions from earned income tax has become too high, legislation has been proposed in the National Assembly to reduce it. In 2017, Lee Jong-koo, then a lawmaker from the Bareun Party, proposed a bill that would require workers earning more than 20 million won a year to pay at least 10,000 won a month in income tax, or 120,000 won a year, even after receiving tax credits. The bill failed to pass. There’s nothing voters hate more than having to pay higher taxes after they’ve been reduced.
Experts agree that in order for South Korea to have a “middle-income, middle-welfare” welfare system, the exemption rate for earned income tax, which is too high compared to other developed countries, must be reduced. This is because with responsibility comes rights and benefits. Compared to OECD countries, Korea’s tax burden is low. If we analyze data from 2015, the last year for which statistics are available for comparison with all OECD countries, Korea’s tax burden was 18.5%. This ranked 33rd out of 35 countries. It is below the OECD average of 25%. Denmark ranked first with 45.8%, Sweden second with 33.6%, Iceland third with 33.1%, New Zealand fourth with 33%, and Finland fifth with 31.2%.
South Korea also ranks 31st in terms of tax burden per capita. Clearly, South Korea’s tax burden is low compared to other OECD countries. Of course, there are many quasi-taxes that are not captured as taxes in Korea’s statistics, so the tax burden rate would be higher if they were included.
In the end, the government is expected to collect KRW 20 trillion more in tax revenue in 2018 than originally projected. However, this is not due to the earned income tax, which is paid by ordinary workers. The reason for the high tax collection is due to a significant increase in corporate and income taxes. Corporate taxes collected 42.5 trillion won from January to July 2018, an increase of 7.7 trillion won from the same period a year ago, while income taxes collected 51.5 trillion won, an increase of 6.9 trillion won from the same period a year ago. The large increase in corporate taxes was due to strong exports, mainly from the semiconductor industry, while the increase in income taxes was due to higher capital gains taxes due to higher real estate prices.
