Lawmakers agree to increase income taxes for top earners
Lawmakers from the three major parties have agreed to create a new tier for taxes on individuals. Those who earn more than 500 million won a year could see their tax rates rise from the current 38 percent to 40 percent starting in January.
Representatives from the three major parties, including Woo Sang-ho, floor leader of the Minjoo Party; Kim Song-sik, chief policymaker for the People’s Party; and Chung Jin-suk, the Saenuri Party’s floor leader, attended a meeting presided over by National Assembly Speaker Chung Sye-kyun on Friday and discussed details of next year’s budget.
Those who attended the meeting agreed not to change corporate taxes, but the opposition parties argued that the government should raise corporate taxes since revenue from it is not growing as fast as it is in other tax categories.
“Instead of raising corporate taxes, we have created a new tier for income taxes, which will raise taxes for high-income groups,” said Woo of the Minjoo Party.
Kim of the People’s Party said, “I am glad that we decided to create the new tier for high-income groups that will have a positive impact on income redistribution in Korea.” Kim added that this reflects the public’s call for politicians to solve inequality and unfairness issues.
“I believe the government will agree with what we have agreed on today,” said Chung of the Saenuri Party.
This is the first time in 16 years that income taxes will reach 40 percent. The rate neared 70 percent in the 1970s but has continued to drop since then and fell to 40 percent in the late 1990s. In 2002, the rate fell below 40 percent for the first time to 36 percent and dropped to as low as 35 percent.
“It appears that about 20,000 people will be included in the top tier,” said an official from the Ministry of Strategy and Finance.
If the agreement they made on Friday goes into effect next year, those who earn more than 600 million won will pay 2 million won extra in taxes and those earning more than 800 million will pay 6 million won.
The government will reportedly collect 600 billion won more in tax revenue through the changes in the income tax tiers, but the official at the Finance Ministry said they haven’t come up with the actual number yet.
“I don’t think there will be a big difference in the government’s tax revenue from creating the new tier in income tax groups,” said Kim Hak-soo, a researcher at the Korea Institute of Public Finance. “I didn’t get a chance to look into it closely yet, but I think it will only be around 200 billion won.”
The corporate tax was one of the key issues that divided the ruling and opposition parties.
During the Lee Myung-bak administration, corporate taxes levied on businesses with annual revenue exceeding 200 million won were cut from 25 percent to 22 percent in 2009.
The rate was further eased in 2012 as the Lee administration raised the ceiling for companies subject to the 22 percent maximum rate from 200 million won in earnings to 20 billion won. At that time the tax rate for companies that earn 200 million won to 20 billion fell from 22 percent to 20 percent.
Representatives from the opposition parties proposed raising corporate taxes to collect more revenue and keep up with the hikes of other taxes. Revenue from corporate taxes has fallen 2 percent in three years from 45.9 trillion won to 45 trillion won, while revenue from income taxes has grown 38.3 percent to 27.1 trillion won in the same period. Opposition parties argued that corporate taxes accounted for 23.3 percent of all tax revenue in 2011, but the share dropped to 20.7 percent last year, which is lower than the proportion of income tax at 27.9 percent.
The ruling party and the government, on the other hand, said the rate hike would be inappropriate due to the country’s sluggish economy and unfavorable economic conditions in the global market, arguing that the corporate tax hike would burden workers and drag down investment in general in the country.
Some have pointed to the corporate tax cut that U.S. President-elect Donald J. Trump has promised and said raising Korea’s own corporate tax rate would be going against the global trend, which could also undermine Korean companies’ competitiveness.
“I think it was a good choice that they didn’t raise the corporate tax since it could have made the sluggish economy even worse,” said Kim at the Korea Institute of Public Finance.
Meanwhile, the state-run think tank’s study released this week argued that a corporate tax hike would lower corporate investment. According to the Korea Development Institute’s report, corporate investment grew 0.2 percentage points when the corporate tax rate was cut 1 percentage point between 2002 and 2014, and it said a permanent tax cut of 1 percentage point would raise corporate investment by 0.29 percentage points in the short run.
Earlier in the year, the Minjoo Party had proposed a maximum 25 percent tax rate on companies earning more than 50 billion won a year.
BY KIM YOUNG-NAM [firstname.lastname@example.org]