Income Tax Hike: A Government Going Backward

The top marginal income tax rate will be raised from 42% to 45%. At a time when countries around the world are responding to the economic crisis caused by COVID-19 with market-friendly solutions, our government alone is increasing the tax burden. This is already the second increase under the Moon Jae-in administration.

With this increase in the income tax rate, Korea’s top marginal income tax rate will become the seventh highest among OECD countries. Raising the top rate is likely to further worsen Korea’s uneven tax rate structure, in which the tax burden is disproportionately high for certain income brackets.

The top 20% of income earners bear 90% of income tax, while 4 out of 10 wage earners pay no earned income tax at all. In 2010, out of 15.18 million wage earners, only 9.24 million were taxable, amounting to just 60.9%.

The remaining 5.94 million people, or 39.1%, pay no tax due to tax exemptions and deductions. In other words, the decision to raise income tax undermines fairness in the tax structure.

When excessive tax rates are imposed on a particular class, they reduce the incentive to work harder and invest in order to earn more income. Those who fall into high-tax brackets may also engage in tax avoidance efforts. Compared to the effect of raising more tax revenue, this can have a greater negative impact on the economy as a whole.

Unlike Korea, the international trend, including among advanced countries, has been to continuously lower top marginal income tax rates. Compared with 2015, the United States and Italy lowered their rates from 46.3% to 43.7% and from 48.8% to 47.2%, respectively. Japan maintained 55.9%, Germany 47.5%, and the United Kingdom 45.0%.

The main reason for this trend toward lower income taxes is that it has become increasingly important to boost national competitiveness by encouraging investment by economic actors. In fact, countries have learned through experience that raising the top marginal rate did not generate much additional tax revenue.

Including local income tax, the newly raised top marginal rate will climb as high as 49.5%, placing it at a very high level globally. It surpasses the 48.8% average of the three Nordic countries, often cited as representative welfare states, and ranks fourth even when compared with the G7 advanced economies.

As a result of the government’s continued disregard for the global trend of lowering top marginal income tax rates, there are concerns that this policy failure will weaken Korea’s competitiveness.

The income tax system should seek a universal taxpaying structure that reflects reality, while taking both equity and efficiency into account. It must be able to reform the problems of a high tax exemption threshold and the weak functioning of the income tax system.

Efforts to normalize the income tax system and establish a sound tax base are needed first and foremost. Such an alternative could help stabilize the balance between ability to pay and tax burden based on real income.

The government should pursue proper tax administration that ensures everyone with income pays taxes, even if only a small amount, rather than imposing excessive taxes on high-income earners, so that it can foster a fair sense of tax responsibility among all citizens.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 소득세 인상, 거꾸로 가는 정부

Author: Sung-no Choi

Date: 2020-12-17

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=23360