Major Recent Changes in Korea's Tax Policies and their Impacts
September 20, 2018
Property & Consumption Tax Division. Estimates and Tax Analysis Department
This report provides an overview of the key recent characteristics of Korea's national tax revenue both from a fiscal and policy perspective, factors affecting it by types of taxes, and the changes in tax revenues. It also lays out key tax policies designed to cope with a changing environment, whether their objectives were realized, and changes in the tax burden by income quintile.
Since 2011, the fiscal revenue has increased at a rate that deviates from the GDP rate, and its elasticity has increased. The variations in the tax revenue amount over the past ten years (totaling 114.5 trillion won) show that the revenue increase mainly originated from a rising income tax revenue (57.9 trillion won) and consumption tax revenue (46.7 trillion won).
Except for recession periods, the income tax revenue showed a sustained or growing upward trend on the back of rising earned incomes. Prior to 2011, tax revenue increases were largely constrained by tax cuts; subsequently, however, tax revenue increased as a result of higher tax base rates and tax increases. The change from earned income deduction to tax credit in 2014 caused the year-on-year average effective tax rate to fall for incomes 300 million won or less but to rise for brackets above 300 million won, while enlarging the share of persons with tax exemptions. The earned income tax credit and child tax credit, which were introduced in 2009 and further expanded in 2015, had some effect on reducing income gaps.
Owing to the high sensitivity of corporate tax to economic conditions, corporate tax revenues showed a downward trend during periods of economic slowdown, but a contrasting upward trend during periods of business recovery. Prior to 2011, tax revenue increases were largely constrained by tax cuts; subsequently, however, revenue increased as a result of reduced tax cuts. Introduced in 2015, the corporate income tax rebate is found to have contributed somewhat to rising household incomes as businesses spent more on dividends, investments, and wages. Tax exemptions and reductions for conglomerates were actively modified (after 2012), notably in the form of reduced R&D expense deductions and investment tax credits.
As to consumption taxes, collected value-added taxes increased steadily owing to rising private consumption. Collected special consumption taxes also increased following a recent expansion of taxable goods. To some degrees, the introduction of a special consumption tax on cigarettes had an effect on falling tobacco sales, reduced consumption of cigarettes, and increased fiscal revenue.
Revenues from property tax, particularly from transfer income tax, increased due to rising real estate transactions. Key policies include reduced tax credits on reported inheritance and gift tax, heavier transfer income tax, and relaxed comprehensive real estate tax.