Tax Policy Suggestions to Enhance Social Inclusiveness

Published on December 23, 2025
Published by Tax Policy Analysis 1 and Tax Analysis Counsel, Estimates & Tax Analysis Department


 

   This report aims to explore the current state of income inequality in Korea and evaluate the role of tax policy in income redistribution, presenting key policy tasks that should be implemented at the present juncture to enhance social inclusiveness.
   The report finds that the income redistribution function of Korea's tax policy is relatively weak, despite increasing public demand for proactive policy to address income equality. This calls for more strategic policymaking to sustain and strengthen social integration. In particular, the report explains that it is hard to expect income inequality to be resolved through economic structures alone, without government intervention, due to structural challenges including sluggish economic growth, widening wage gaps, and the possibility of greater wealth inequality.
   The report identifies several causes for the limited income redistribution of the Korean tax system, such as generally low effective income tax rates and limitations in the taxation of capital gains. As Korea's top marginal income tax rate is high and applies to the very high income tax bracket, nominal progressivity is high while the overall effective tax rate is low, limiting the tax system's income redistribution. In addition, due to the lack of a comprehensive tax framework for income from financial asset investments, despite the sizeable development of the capital market, tax equity between such income and labor income remains unbalanced.
   Against this backdrop, the report suggests the following tasks to enhance social inclusiveness, such as normalizing the income tax system by gradually increasing the share of income tax in the national tax revenues, strengthening taxation of capital gains, and reforming property taxation. Regarding income taxation, the report recommends establishing comprehensive taxation for capital gains, including financial income, for the mid to long-term while improving the existing tax framework to reduce distortions in the capital market. For property taxation, it advocates for revising the classification of taxable items and tax rates with the aim of pursuing a balance between the taxation of property income and labor income and strengthening income redistribution. The report further recommends that the tax base shall include not only real estate but also financial assets, and that tax shall be imposed not on 'the value of property' but on 'income' derived from property, given that a transition to a holding tax system would fundamentally require a valuation system covering both real estate and financial assets. Regarding consumption taxation, the primary goal shall be to establish a sustainable system for welfare funding, while adjusting the scope of VAT exemptions in areas where the exemption benefits disproportionately accrue to high-income earners or where exemptions are no longer justified due to circumstantial changes (e.g., private education, finance & insurance, for-profit artworks). Lastly, the report mentions the importance of coordination between tax policy and social expenditure, stressing the need to expand social spending by utilizing earmarked taxes for general purposes based on evaluations of goal achievements prior to increasing taxes to fund welfare programs.