Tax exemption missing its target

Chung, a 35-year-old housewife, recently visited her primary bank’s branch to sign up for an individual savings account, or ISA. The ISA is a tax-exempt financial product that is currently being promoted by the government to benefit average Koreans.

But Chung was told she was ineligible to sign up for it.

“The ISA is only for wage earners or business owners,” the bank’s clerk said.

“I felt wronged when I could not use childcare leave because the company I worked for was not happy to provide it. And now that I am a full-time mom, I am left out of the government’s various support measures,” Chung said.

The ISA was set up by the government to “give average Koreans a chance to increase their wealth,” and it has attractive tax incentives, exempting taxes on capital income up to 20 million won ($17,400) per year for five years.

There are, however, criticisms that while high-income individuals like corporate CEOs, doctors or lawyers are eligible to sign up, it excludes those who are probably in more dire need of such support.

Since the ISA is only open to wage earners or business owners, this has left out people like contract workers and housewives, many of whom have not even signed up for the national pension.

Theoretically, housewives can sign up for the national pension, but they have to contribute funds from their own pocket for more than 10 years before they’re eligible to collect. As a result, many have opted not to.

As of the end of 2014, housewives accounted for only 1 percent, or 200,000, of the 21.1 million pension fund holders.

“The husband’s income is seen as mutual income between the spouses, and the court recognizes the wife’s contributions to asset accumulation during divorce proceedings,” said Park Byeong-woo, an executive at the Korea Financial Investors Protection Foundation.

“But financial and tax-related policies are designed to benefit low-income households or wage earners, and tend to leave out housewives. This has created a vicious cycle where the level of poverty faced by elderly housewives with little to no retirement plans rises significantly,” Park added.

Under current regulations, other self-employed individuals, such as farmers, are left out as well. Unless the farmer has set up a farming business or is part of one, he or she is considered neither the wage earner nor business owner.

“Fishermen are normally registered as business owners, but one should consider that the majority of farmers’ incomes are not taxable,” the Ministry of Strategy and Finance said during National Assembly’s audit session when the criticism arose.

The ministry has since changed its stance and said it will think of ways to include farmers.

But contract workers are left out as well.

A 26-year-old part-time actor surnamed Choi made 7 million won last year, but since the entertainment industry tends to rely on verbal agreement rather than written contracts, he is categorized as an “other income earner.”

The government levies a 3.3 percent tax on his income because his status means he can’t enjoy the income tax exemption usually given to those who earn less than 5 million won per year.

“Countries like the United Kingdom and Japan, which are also dealing with aging demographics, have no other eligibility standards other than age,” said Kim Jae-chil, a researcher at the Korea Capital Market Institute.

BY JUNG SUN-EAN [park.jungyoun@joongang.co.kr]