South Korea’s tax burden rate is considered to be lower than the average for the Organization for Economic Cooperation and Development (OECD). However, the tax burden as perceived by the public may feel different. Are Koreans actually paying a lot in taxes? We will examine this question by looking at the meaning of the tax burden rate and comparing it internationally.
The National Budget, Taxes, and the National Economy
By looking at the government’s budget proposal for the following year, which is decided at the end of each year, we can see how the government and the National Assembly assess the national economy’s performance over the past year and the economic outlook for the coming year. Just as with a household budget, when a country’s income decreases, it cannot simply commit to spending heavily in various areas. Of course, there are times when the government increases the budget more than usual to prevent an expected economic downturn, but fundamentally, a budget can only be expanded if it is backed by solid tax revenue.
A long time ago, in September 2018, South Korea’s Ministry of Economy and Finance, which oversees the nation’s finances, announced a massive plan to spend 470.5 trillion won for the following year’s government budget. Compared to the 2018 government budget, the scale had increased by 9.7%. This is on par with the 10.6% increase in the 2009 government budget, when massive government spending was required to prevent an economic downturn caused by the global financial crisis. The government submitted this significantly expanded budget proposal to the National Assembly because it judged that extraordinary measures were necessary to create jobs and keep the engine of economic growth running. Above all, the decision to draft such a large-scale budget was supported by projections that tax revenue would exceed the budget increase.
In this blog post, we will examine how much taxes South Korean workers and individuals are paying, based on the government’s 2019 budget proposal and data from the National Assembly Budget Office and the OECD (Organization for Economic Cooperation and Development). How could the government’s tax revenue have increased significantly when more than 40% of all wage earners pay no income tax at all?
Tax Burden Rate and the Level of Tax Burden on Citizens
Without taxes, the state cannot be sustained. This is because if citizens do not pay taxes, the government cannot pay the salaries of civil servants and military personnel, nor can it properly fulfill its minimum responsibilities, such as national defense, diplomacy, and public safety. A look at history reveals that tax issues were at the heart of most major revolutions, wars, and independence movements. The United States, then a British colony, decided to seek independence from Britain largely because the British government and Parliament attempted to impose taxes on the colonies, such as the Sugar Act and the Stamp Act. The United States resolved to gain independence when Britain sought to increase taxes while blocking its representatives from participating in Parliament. Representatives from the 13 American colonies launched the War of Independence with the slogan, “No taxation without representation.” As historical examples show, imposing taxes fairly is paramount to maintaining a stable nation. If taxes are imposed unfairly, dissatisfied citizens may rise up at any time.
Trends in the Tax Burden Rate
The tax burden rate is a statistical measure used as an international benchmark to show how much tax a country’s citizens are paying. By looking at the tax burden rate, one can immediately see the proportion of taxes relative to GDP. The tax burden rate is calculated by dividing the total amount of taxes paid by citizens and businesses over the course of a year—that is, the sum of national and local taxes—by nominal GDP. On August 5, 2018, the Ministry of Economy and Finance announced that South Korea’s tax burden ratio for 2018 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, one should not simply hear this and conclude, “So South Koreans pay 20.2% of their annual salary in taxes.” This is because national taxes—which form the denominator of the tax burden rate—include not only taxes paid by individuals but also corporate income taxes paid by businesses. One should not assume that taxes are deducted from personal income exactly in the amount indicated by the tax burden rate.
A statistic similar to the tax burden rate is the national burden rate. To calculate the national burden rate, one adds the total national and local taxes collected by the government over the course of a year to the premiums paid by citizens for the four major social insurance programs and contributions to social security funds, and then divides that total by nominal GDP. While the tax burden rate is calculated by adding only national and local tax revenues, the national burden rate also includes premiums for the four major social insurance programs and contributions to social security funds, which effectively function as quasi-taxes. Consequently, its share of GDP is bound to be higher than that of 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.
As mentioned earlier, the government’s national tax revenue was expected to increase significantly in 2018, which effectively means that the tax burden rate rose. Statistics released by Statistics Korea show a trend of the tax burden rate continuing to rise over the past few years. The tax burden rate, which stood at 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 had estimated that the additional tax revenue collected in 2018 alone would exceed 20 trillion won. “Excess tax revenue” refers to tax revenue collected in excess of what was originally projected when drafting the government’s budget for that year.
However, the Ministry of Economy and Finance has taken a cautious stance regarding the tax burden rate exceeding 20%. This is because the number “20” carries symbolic significance. During a parliamentary audit in October 2017, Kim Dong-yeon, then Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, stated, “There are factors to consider, such as public consensus, when the tax burden rate exceeds 20%.” This implies that the tax burden rate—a figure that reflects the weight of taxes borne by citizens and businesses and the level of welfare they can enjoy as a result—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 general public.
The Issue of Income Tax Exemptions for Earned Income
Before deciding whether to raise the tax burden rate, there is one issue that must be addressed first. Let me ask a question. A significant number of readers of this article are likely salaried employees working for companies. So, among South Korean salaried employees—that is, those with earned income—what percentage pays no income tax at all?
When asked this question, many might think, “Everyone who works for a company and receives a salary 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 did not pay a single won in income tax—that is, those exempt from income tax—reached 43.6%. The percentage of workers exempt from income tax, which stood at 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.
You might wonder, “If income tax is automatically deducted from my paycheck, how can so many people not be paying taxes?” The high proportion of individuals exempt from income tax is due to tax credits. Even if they initially paid taxes, when you factor in the amounts they receive back through various tax credits during the year-end tax settlement, more than 40% of salaried workers are effectively not paying income tax. Experts explain that the proportion of tax-exempt individuals rose significantly after the special deduction system for earned income shifted from an income deduction to a tax credit in 2014.
Some view it as a problem that nearly half of salaried workers do not pay a single penny in income tax. This is because it violates the principle of income tax, which states that taxes should be levied where there is income. Furthermore, as the income tax burden is concentrated on specific groups, the principle of universal taxation—that all citizens should pay taxes—has been weakened. The argument is that there is an issue of fairness since nearly half of wage earners do not pay taxes. To participate in national decision-making as sovereign citizens, the costs associated with those decisions must be borne fairly according to one’s ability; however, this is not currently being achieved. Furthermore, it is pointed out that since South Korea will face worsening low birth rates and an aging population in the future, income tax—which allows for broad-based tax collection—must be strengthened to cover the rising costs of welfare. There is also significant support for the view that if we wish to enjoy a welfare system on par with that of developed nations, we must bear a tax burden comparable to that of their citizens. If the issue of the income tax exemption for earned income is not resolved, raising the standard of welfare will be virtually impossible.
As the income tax exemption rate for earned income 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 with an annual income of 20 million won or more to pay at least 10,000 won per month—or about 120,000 won per year—in income tax even after receiving tax credits. However, the bill did not pass. This is because there is nothing voters dislike more than having tax cuts reversed.
Experts unanimously point out that for Korean society to establish a “moderate burden, moderate welfare” system, it must first reduce the income tax exemption threshold, which is excessively high compared to major developed nations. This is because rights and benefits can only follow when there is a corresponding sense of responsibility. A comparison with other OECD member countries reveals that South Korea’s tax burden rate is relatively low. An analysis of 2015 data—the most recent year for which comparable statistics are available across all member countries—shows that South Korea recorded a tax burden rate of 18.5% at that time. This ranks 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 compared based on the national burden rate, South Korea ranked 31st. It is clear that South Korea’s tax burden is relatively low compared to other OECD member countries. Of course, some argue that since South Korea has many quasi-tax burdens that are not classified as taxes in statistics, the tax burden would actually be higher if these were fully accounted for.
Returning to the main point, the government is expected to collect 20 trillion won more in national tax revenue in 2018 than originally projected. However, this is not solely due to the income tax paid by ordinary salaried workers. The reason for the high tax collection is that corporate and income taxes have increased significantly. From January to July 2018, 42.5 trillion won in corporate tax was collected, an increase of 7.7 trillion won compared to the same period a year earlier. During the same period, income tax revenue also reached 51.5 trillion won, an increase of 6.9 trillion won compared to the same period a year earlier. The significant rise in corporate tax revenue appears to be driven by strong exports, particularly in the semiconductor sector, while the increase in income tax revenue is likely due to higher capital gains tax revenue resulting from rising real estate prices.
