Tax plan hard on the youngAlthough the government highlighted that it will reduce the burden on the middle class by reforming the tax codes, it turns out the latest plan doesn’t treat young people nearly as well as it does the retired, elderly or disabled.
Under the plan by the Choi Kyung-hwan economic team announced Wednesday, the government decided to integrate tax-cutting savings products into a single tax-exemption savings product for savings of up to 50 million won ($48,258) for people aged 65 or older. The new product also would benefit those who are physically challenged.
Currently, there is one savings product for people aged 19 to 60 with lower taxes on up to 10 million won. The other is for those in their 60s or older with lower taxes on up to 30 million won.
The latest tax reform is focused on helping the working class build assets, the government said. The government’s definition of working class is employees who earn 25 million won or less a year or self-employed businesspeople who make 16 million won or less.
At the same time, younger consumers will have to pay higher taxes on savings, as the rate will go from 9.4 percent to 15.4 percent when the products are restructured.
There are nearly nine million tax-cut savings accounts at seven commercial banks, according to the industry. Holders of the accounts will need to pay at least 18,000 won more on interest earned starting next year.
“It is unfortunate news for young customers who are interested in the so-called se-tech [savings taxes in Korea],” said a manager at Hana Bank. “There hasn’t been a reaction yet from customers, but it would quickly affect the way young people keep their savings.”
According to an official at the Ministry of Strategy and Finance, even though current savings products are repealed, there will be greater tax benefits overall.
“Many of the younger population will be able to benefit from expanded tax deductions for housing subscription savings and a new type of asset building savings product,” the official said.
The government decided to increase tax deductions for those who have subscribed to housing savings and earn 70 million won or less a year by doubling the ceiling from 1.2 million to 2.4 million won.
As for the so-called asset building savings products that require accounts to be active for a minimum of seven years, the government decided to shorten the mandatory period to three years for people between 14 and 29.
Another tax increase that is likely to affect the young population is that the government will start imposing a 10 percent value-added tax on purchases of smartphone applications sold on foreign online markets run by Google and Apple.
The Wednesday tax reform plan aimed at increasing taxes for large companies and top earners, while easing the burden for the middle class, got a lukewarm reception analysts and the market.
“Whether the plan will contribute to increasing incomes of ordinary households or not remains questionable,” said Lee Jun-hyup, a research fellow at Hyundai Research Institute.
“To boost the market, it is crucial to help increase incomes of low-income households rather than the high-income bracket, but the government plan lacks such measures.”
He added that the expanded tax deductions wouldn’t help those in the low-income bracket much.
The Korean stock market fell again yesterday after the tax reform announcement on Wednesday, indicating that investors may be disappointed with the plan.
Some shares already rallied on news that the government will provide incentives for businesses that increase employee wages and investor dividends ahead of the official announcement.
BY SONG SU-HYUN [firstname.lastname@example.org]
More in Economy
It's a good time to give away residences
Unemployment line adds insult to injury for the jobless
Number of part-time workers hits record high
Closing for good
Those who didn't buy are singing the real estate blues