Revamp the tax code for the middle class

A salary-earner would feel everything has gone up except for their monthly paycheck. But on data, it is not entirely true. Wages increased 5 percent a year on average. In February, the Federation of Korean Trade Unions demanded a 8.5 percent hike in wages. Unions would claim that salaries must go up along with inflation. After wage negotiations, salaries in Korea have gained around 5 percent on average annually.

Still, most salary-earners can only complain these days. The spike in consumer prices this year is one reason. The income tax code that does not reflect inflation is another. Income tax rate should be adjusted according to inflation, which is the case in most advanced economies.

Let’s presume that annual salary will be raised 5 percent this year for a 50-million-won ($38,461) earner to 52.5 million won. In that case, real income would be negative since inflation has gone up 6 percent so far this year.

Income tax code is revised over several years. But the income tax rate for earners of 88 million or less has stayed the same for the past 12 years. In 2010, the tax rate for the income bracket of 12 million won or less was lowered to 6 percent from 8 percent, the 12-million-won to 46-million-won bracket to 15 percent from 16 percent, and the 46-million-won to 88-million-won bracket to 24 percent from 25 percent. Despite inflation gains over the years, the income tax rate is unchanged.

The government has increased the tax bracket to eight by adding the top 1 billion won or more category for the maximum rate of 45 percent. While raising the rich tax, the tax for the middle to lower income class stayed the same. Amid a widening income gap with stagnation for the middle or working class, the broad salary-earners have been feeling a greater tax pinch. Even for those who receive 100 million won in income, not much is left in the bank account after various social taxes.

While monthly salaries for wage-earners rose 17.6 percent on average from January to October last year compared to 2016, labor income tax and social insurance premiums went up by a whopping 39.4 percent. The new government must focus on regulatory reforms over the long haul, but it also needs to seek to help the middle or working class struggling with strong pries. If the income tax rate is rationalized, labor unions’ demand for wage increases could lessen. Before Deputy Prime Minister for Economic Affairs Choo Kyung-ho pleads to employers not to raise wages too much due to inflationary pressure, he must turn attention to the sclerotic tax code for the middle class.