Evolution of the Korean Tax System and its Current Status
This report provides an overview of how the tax system and types of taxes in Korea have evolved in line with the changing tax environment over the course of 70 years since the government was founded.
It first lays out the changes in the tax environment and the tax system in different time periods. In the past 70 years since 1948, the year the government was established, the tax system evolved in line with various changes in the economic and social structure. Tax laws and regulations were legislated after 1948 in consideration of the nation’s particular situation, and a new tax system was launched consisting of 45 types of taxes (20 national taxes, 25 local taxes). During a period of economic development in the 1960s and 1970s, the tax function was reinforced as a policy tool to support industrialization. It was during this period that taxes were simplified and the value-added tax was introduced, laying the basis for the tax system today. During a period of open economy in the 1980s and 1990s, a number of new tax items (special tax for rural development, transportation tax, etc.) were instituted against a changing tax environment, but without major changes to the tax system. Following the foreign exchange crisis in the 2000s, certain tax items were reorganized (the introduction of earned income tax credit (EITC), higher tax rates, etc.) to create revenue source for social security programs and income redistribution amidst slowing growth and deepening income gaps. The comprehensive real estate holding tax was also introduced to strengthen taxation on real estate possession.
The report also looked at how various types of taxes developed against economic and social changes. Income taxes, imposed for the first time in 1949 based on the Income Tax Act, underwent some changes to ensure fair taxation (introduction of general taxation system) and enhanced income redistribution (introduction of EITC). Corporate taxes, created as a separate tax item in 1949, evolved into an industrial support policy tool (temporary investment tax credit) to cope with the changing economic structure (job creation tax credit). As to consumption taxes, the special consumption tax system was maintained until 1976. Subsequently, taxes were simplified, the value-added tax was introduced, and some modifications were made to rationalize taxation (special provisions on taxation abolished) without greatly impacting the tax system itself. Property taxes evolved in line with policies to address the changing economic and social environment (introduction of anti-speculation tax and comprehensive real estate holding tax), while local taxes, a system that had largely been administered by the central government, also underwent changes based on policies to facilitate local self-government and decentralization of local finances (introduction of local consumption tax).