As prices and wages rise, the taxable income base for income tax has remained stagnant for a long period, leading to criticism that the tax burden on wage earners is effectively increasing. Experts have suggested that taxable income brackets and various deduction amounts should be linked to inflation or adjusted periodically.
Experts consistently point out the disconnect between nominal income and real income. Even if monthly wages rise due to inflation, if purchasing power remains unchanged, real income does not increase. However, if the taxable income base remains fixed, individuals may move into higher tax brackets, increasing their tax burden.
Under the current income tax system, progressive tax rates ranging from 6% to 45% are applied based on taxable income. While the lower taxable income bracket was adjusted once in 2023, the threshold of 88 million won for the 35th% tax rate has remained unchanged since 2008, marking its 18th year without adjustment.
Oh Moon-seong, a professor at Hanyang Women's University Department of Taxation, stated, "If nominal income increases due to inflation leads to an expanded tax burden relative to income, real purchasing power could decline." He added, "Inflation fluctuations must be reflected in taxable income brackets and income deduction amounts." Critics also note that fixed-amount deductions, such as those for dependents, have not been adjusted for a long time, weakening their function in alleviating household burdens.
Regarding the adjustment cycle, Professor Oh proposed specifying in the Income Tax Act that inflation fluctuations be reviewed every three to five years rather than mechanically applying the annual consumer price inflation rate. He remarked, "It is not desirable to make an adjustment once and leave it unchanged for 10 or 20 years before addressing issues when they arise."
Ahn Chang-nam, former professor at Gangnam University Department of Taxation, advocated for automatically adjusting the entire tax law framework annually in line with inflation. Professor Ahn stated, "If taxable income and deduction amounts are not adjusted together, it results in taxing higher nominal incomes driven by inflation." He emphasized, "It should not be a one-time increase but an automatic annual adjustment based on the consumer price index."
Addressing claims that South Korea's income tax burden is low, Professor Oh pointed out, "Given that the marginal tax rate for high-income earners, including the top tax rate and local income tax, is high, and additional burdens such as social insurance premiums exist, it is difficult to definitively conclude that South Korea's income tax burden is low."
Kang In-soo, a professor at Sookmyung Women's University Gyeong Je-hak-gwa (Prof.), also stated, "International comparisons should be made by considering the overall tax burden, including indirect taxes and quasi-taxes such as social insurance premiums." He added, "Rather than starting from the total tax revenue the government needs to secure, we should first determine what level of tax burden is appropriate for citizens."
Some argue that now is the right time for tax reform, given the recent increase in tax revenue due to the semiconductor boom. Professor Ahn stated, "With semiconductor companies performing well and tax revenues rising, there is now room to reform the tax system." He added, "As the economy grows, the tax base should be expanded while reducing the tax burden on wage earners."
Professor Oh also addressed concerns about potential revenue loss from adjusting taxable income brackets, stating, "With corporate and income taxes collecting more than expected currently, it is not the time to worry about insufficient tax revenue."
On the other hand, Kim Woo-cheol, a professor at University of Seoul Department of Taxation, agreed with the principle of inflation-linked systems but cautioned against hasty implementation. Professor Kim stated, "While South Korea's income tax system has a high progressive rate, the amount collected through individual income tax is relatively low, so redistribution effects are not fully realized." He added, "Raising the 88th million won taxable income threshold could further weaken the primary tax revenue base."
Professor Kim argued that instead of further increasing tax rates for high-income earners, various deductions should be streamlined and the tax base expanded to include middle- and lower-income groups to increase overall income tax revenue. He remarked, "It would be preferable to introduce an inflation-linked system only after the income tax burden and its share of total revenue reach appropriate levels." He also added, "While recent increases in semiconductor-related tax revenues have reduced immediate pressure for tax hikes, long-term revenue expansion is necessary to prepare for increased expenditures due to aging population."
Legislative efforts on this issue continue within the political sphere. Lee In-seon, a People Power Party member of parliament, introduced an amendment to the Income Tax Act last March that would first raise taxable income brackets applicable in 2027 and subsequently reflect annual inflation rates. A fellow party member Kim Mi-ae (Rep.) also proposed an amendment last April to adjust benchmark amounts for each taxable income bracket annually based on inflation rates.
in ECONOMY
