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[Editorial] Inequitable taxation

Korea’s excessive reliance on large firms, rich people for tax revenue is unsustainable

Late Samsung Group chief Lee Kun-hee’s heirs, including his only son Jae-yong, the vice chairman of Samsung Electronics, are set to shoulder a record amount of inheritance tax, as he left behind about 18 trillion won ($15.9 billion) in stock assets.

The total inheritance tax to be paid by them is estimated to be close to 11 trillion won, exceeding the total of 10.6 trillion won that the National Tax Service collected in inheritance tax from 2016 to 2019.

The case, which also concerns the family trying to retain control over South Korea’s largest conglomerate, rekindles the question of whether the country’s inheritance tax rate, which can go up to 60 percent for stocks left by the largest shareholder of a company, is appropriate or not.

It might go further to shed light on the nation’s excessively disproportionate reliance on large corporations and affluent individuals for tax revenues.

According to data compiled by an opposition lawmaker’s office in August, the top 1 percent of companies in terms of turnover paid 78.4 percent of all corporate taxes in 2018, up from 75 percent four years earlier.

Over the cited period, their proportion of corporate revenues was down from 51.6 percent to 50.2 percent.

The highest 1 percent of individual income earners shouldered 41.6 percent of income tax in 2018, while earning 11.2 percent of total income. The corresponding figures for the top 10 percent bracket stood at 78.3 percent and 36.8 percent, respectively, in the same year.

In the case of wage earners, the top 1 percent and 10 percent groups each paid 32 percent and 73.7 percent of total taxes collected from salaried workers in 2018, while their shares of aggregate salaries remained at 7 percent and 31.6 percent.

By contrast, nearly 4 in 10 wage earners paid no taxes in the cited year. The proportion of workers who are tax exempt in Korea is higher than the figures for most member states of the Organization for Economic Cooperation and Development.

This unbalanced taxation system has been aggravated sharply in recent years, as President Moon Jae-in’s administration has focused on imposing heavier levies on the rich and large firms while maintaining or expanding tax benefits for the rest.

Korea’s maximum income tax rate is set to increase from 42 percent to 45 percent next year, far above the OECD average of about 35 percent.

The Moon government raised the maximum corporate tax rate from 22 percent to 25 percent in 2018 in a move against the global trend to lower levies on private firms. The OECD average, which stood at 34 percent in 2000, has continued to decrease to slightly over 20 percent.

It is a fundamental principle that every citizen earning incomes and benefiting from public services should pay some amount in taxes. It goes against this principle to further raise highly progressive rates imposed on high-income earners and large profitable firms while leaving a large portion of workers and businesses exempt from tax payment.

This distorted structure of taxation is simply unsustainable, as fiscal expenditure is projected to grow steeply in the coming years to cope with the economic shock of the pandemic crisis and finance expanded welfare programs, while tax revenues are continuing to decline.

According to the government’s fiscal management plan for the next five years, the country’s national debt that has to be repaid with taxpayers’ money is forecast to reach 899.5 trillion won in 2024, up 77.5 percent from this year. Korea saw tax revenues fall by 23.3 trillion won on-year to 132.9 trillion won in the first half of this year.

If tax increases are inevitable to strengthen the social safety net and help reinvigorate the economy, the focus should be put on expanding the tax base in accordance to the principle of universal taxation. Calls for a higher tax burden on the affluent could sound more persuasive when the taxation system is established to ensure all people pay their share.

Continuing to increase the already excessive burden on high income-earners and large corporations could also run the risk of deepening economic sluggishness by reducing consumption and investment.