A draft tax code revision for next year, which is to be announced by the government this week, is expected to leave the existing taxation scheme largely intact.

Opposition lawmakers have recently submitted bills calling for a rise in the maximum rate of corporate tax from the current 22 percent to 25 percent. But the government and the ruling Saenuri Party have persistently opposed increasing levies on corporate profits.


Participants at a seminar arranged by the ruling party last week raised their voice against increasing corporate taxes, which they argued would weaken business activities and hamper efforts to reinvigorate the economy. They drew attention to the fact that 18 of the 34 member states of the Organization for Economic Cooperation and Development have lowered corporate tax rates since the 2008 global financial crisis.

Government policymakers have made it clear that the draft tax code revision will not include an increase in income and consumption taxes as well as corporate tax.

They also suggest most of the 25 tax exemptions and breaks that are supposed to be repealed at the end of this year will be extended further.

Financial experts say leaving the existing taxation system unchanged would result in the national debt nearly doubling from 392 trillion won ($344.5 billion) in 2010 to 761 trillion won in 2019 as fiscal spending is set to increase to finance expanded welfare programs and assume a bigger role in bolstering the economy.

Despite the prolonged economic downturn, the country’s tax revenues have exceeded forecasts by budget planners since last year.

According to the National Assembly Budget Office, the unexpected rise in tax revenues was due mainly to a boom in the property market. With the housing market showing signs of cooling down as the government has tightened regulations on mortgage loans, the revenue increase may not continue for longer.

In a report released last week, the NABO noted that expanding the state budget on the assumption the tax revenues will continue to be on rise would put strains on fiscal management when the real estate boom is dampened.

Experts raise the need for an overhaul of the taxation system, which they say should start with the reduction and scrapping of a complex set of tax credits.

According to government data, the country’s ratio of tax payment to gross domestic product decreased from 19.6 percent in 2007 to 17.9 percent in 2013 before slightly rising back to 18 percent in 2014. Experts estimate the figure would reach 19 percent this year.

Over the three years from 2013, annual earned and transfer income tax revenues increased by 11.6 percent and 16.7 percent on average, respectively, far exceeding the corresponding figure for overall national tax revenues at 2.4 percent.

By contrast, the annual collection of corporate and value added taxes showed an average decrease of 0.7 percent and 0.9 percent over the cited period.

Calling for corporate tax hikes, opposition lawmakers indicate the lessened tax burden on companies has not led them to increase investment and employment.

Government and ruling party policymakers say that, in case a tax increase is inevitable, it would have a lesser impact on the economy to raise income and consumption taxes than corporate tax.

Many experts say it is necessary to reduce the overstretch of tax exemptions and breaks that now allows nearly half of 16.69 million waged workers in the country not to pay a penny in earned income tax. The ratio remained at 32.4 percent in 2013 when President Park Geun-hye’s administration was installed.

“Nowadays, middle-income self-employed people pay more taxes than most wage earners,” said Kim Tae-il, a professor of public administration at Korea University in Seoul.

Efforts to expand sources of income tax revenue need to be matched with policies to increase earned income and levy a heavier tax on asset income, experts say.

Kang Byung-koo, an economics professor at Inha University, said the proportion of workers exempted from taxation should be cut in tandem with measures to substantially raise the minimum wage, noting nearly half of the country’s employed workers are paid less than 20 million won in annual wages.

The existing taxation scheme has been criticized for being too loose on asset income, subjecting a mere 0.1 percent of investors in the stock market to a transfer tax and exempting levies on rental income of up to 20 million won per year.

Experts note it is necessary to strengthen taxation on asset income to enhance fairness with levies on earned income.

This would also help make low-income people be more ready to pay a minimum level of tax, they say.

By Kim Kyung-ho (khkim@heraldcorp.com)