Reforming our tax codeDebates about our tax system are gaining momentum after the opposition Minjoo Party of Korea proposed a revision to the tax code targeting large companies and individuals in the top income bracket. Given our alarmingly low birthrate and rapidly aging population, our current tax system must be amended. We welcome the opposition’s timely proposal.
The party’s populist proposal needs thorough scrutiny. First of all, the idea of levying a 41 percent tax on those who annually earn more than 500 million won ($447,227) is worth considering. (Currently, our highest income tax rate is 38 percent.) The figure is lower than the OECD average of 43.3 percent. Under the party’s proposal, those subject to the 41 percent tax account for 0.04 percent — or 6,336 citizens — of all income earners in 2014. That will bring approximately 400 billion won more tax revenue to the government. Despite its small size, it could symbolize an effort to ease the widening wealth gap in our society.
The problem is the party’s lack of willingness to address our overly high ratio of income tax exemptions, which reaches 48.1 percent: One out of two income earners don’t pay any income tax. Nearly all income earners pay income tax in the United Kingdom, while 15.8 percent of Japanese, 19.8 percent of Germans, and 22.6 percent of Canadians are exempted from the tax.
The share of Korea’s income tax revenue to its gross national product is also lower than that of the OECD average. To meet OECD standards, the party needs to lower the ratio of income tax exemption to less than 30 percent, while creating the new higher income tax bracket at the same time.
The Minjoo Party’s proposal to raise the corporate tax rate for companies with more than 50 billion won in annual revenue to 25 percent is unrealistic. The share of our corporate tax to our GDP is 3.2 percent, already above the OECD average of 2.9 percent. As global companies move their headquarters and factories overseas for lower corporate taxes, European countries are competing to cut their corporate tax rates particularly after the Brexit vote. A higher corporate tax could trigger an exodus of our struggling domestic manufacturers. It would be better to reduce their tax deductions if the party really wants to raise our corporate tax.
The government and ruling party must join the debate on tax reform. Now that our welfare costs are approaching 10 percent of our GDP, the government can hardly manage the budget. We urge the government to notch up our relatively low value-added tax.
JoongAng Ilbo, August 4, Page 34