Major Issues in Tax Policy and Directions for Reform
Joosung Jun, Youngim Shin, Hyemi Kim
Commissioned Research Report for the National Assembly Budget Office (NABO), 2023
Summary
Korea's tax burden remains below the average level observed in advanced economies, while fiscal demands continue to rise due to population aging and the expansion of social welfare programs. The central policy challenge is whether the current tax system can generate additional revenue in an efficient, equitable, and politically sustainable manner.
This study reviews major issues in Korean tax policy and evaluates potential reform options across the principal tax bases—including personal income taxation, consumption taxation, corporate taxation, and property taxation. It also examines broader strategies for expanding the tax base through reductions in tax expenditures and the informal economy. The report aims to provide both theoretical and empirical foundations for long-term tax reform and to contribute to public discussion on future fiscal sustainability.
Key Policy Implications
Although Korea's overall tax burden is lower than the OECD average, growing welfare expenditures and demographic change suggest that higher tax revenues will likely be required in the long run.
The Korean tax system has become increasingly complex through a series of incremental reforms rather than comprehensive restructuring. Additional tax increases under the current system may generate substantial economic inefficiencies and political resistance.
Public trust in government remains relatively low compared to Korea's level of economic development. Without improvements in government credibility and spending efficiency, efforts to increase taxes may face significant taxpayer resistance.
Personal income taxation should focus on broadening the tax base while minimizing efficiency losses. The study examines the structure of progressive taxation, horizontal equity across income sources, and tax avoidance incentives arising from differences between personal and corporate tax rates.
Consumption taxation offers a relatively broad and stable revenue source. The report evaluates the design of value-added taxes, selective excise taxes, earmarked taxes, differentiated tax rates across goods, and the potential role of luxury taxation.
Corporate taxation should balance revenue generation, competitiveness, and Korea's institutional characteristics. The study reviews the trade-offs between corporate tax rate reductions and tax incentives, while also discussing recent developments in international taxation, including digital taxes and the global minimum tax on multinational enterprises.
Property taxation has the potential to promote both revenue generation and equity but faces strong political resistance. The report examines issues related to wealth inequality, the balance between transaction taxes and holding taxes, and reforms to inheritance and gift taxation.
Given the possibility that household wealth may gradually shift from real estate toward financial assets, a more systematic framework for property taxation will become increasingly important.
Beyond traditional tax bases, the report highlights the importance of reducing tax expenditures and shrinking the informal economy as alternative means of expanding the revenue base.
Korea's informal economy remains relatively large by advanced-country standards. Strengthening tax compliance and reducing informal economic activity could provide additional fiscal resources without raising statutory tax rates.
The report argues that successful long-term tax reform requires a comprehensive approach that simultaneously addresses efficiency, equity, revenue sustainability, and public acceptance rather than relying on piecemeal policy adjustments.
Major Issues in Tax Policy and Directions for Reform
Joosung Jun, Youngim Shin, Hyemi Kim
Commissioned Research Report for the National Assembly Budget Office (NABO), 2023
Summary
Korea's tax burden remains below the average level observed in advanced economies, while fiscal demands continue to rise due to population aging and the expansion of social welfare programs. The central policy challenge is whether the current tax system can generate additional revenue in an efficient, equitable, and politically sustainable manner.
This study reviews major issues in Korean tax policy and evaluates potential reform options across the principal tax bases—including personal income taxation, consumption taxation, corporate taxation, and property taxation. It also examines broader strategies for expanding the tax base through reductions in tax expenditures and the informal economy. The report aims to provide both theoretical and empirical foundations for long-term tax reform and to contribute to public discussion on future fiscal sustainability.
Key Policy Implications
Although Korea's overall tax burden is lower than the OECD average, growing welfare expenditures and demographic change suggest that higher tax revenues will likely be required in the long run.
The Korean tax system has become increasingly complex through a series of incremental reforms rather than comprehensive restructuring. Additional tax increases under the current system may generate substantial economic inefficiencies and political resistance.
Public trust in government remains relatively low compared to Korea's level of economic development. Without improvements in government credibility and spending efficiency, efforts to increase taxes may face significant taxpayer resistance.
Personal income taxation should focus on broadening the tax base while minimizing efficiency losses. The study examines the structure of progressive taxation, horizontal equity across income sources, and tax avoidance incentives arising from differences between personal and corporate tax rates.
Consumption taxation offers a relatively broad and stable revenue source. The report evaluates the design of value-added taxes, selective excise taxes, earmarked taxes, differentiated tax rates across goods, and the potential role of luxury taxation.
Corporate taxation should balance revenue generation, competitiveness, and Korea's institutional characteristics. The study reviews the trade-offs between corporate tax rate reductions and tax incentives, while also discussing recent developments in international taxation, including digital taxes and the global minimum tax on multinational enterprises.
Property taxation has the potential to promote both revenue generation and equity but faces strong political resistance. The report examines issues related to wealth inequality, the balance between transaction taxes and holding taxes, and reforms to inheritance and gift taxation.
Given the possibility that household wealth may gradually shift from real estate toward financial assets, a more systematic framework for property taxation will become increasingly important.
Beyond traditional tax bases, the report highlights the importance of reducing tax expenditures and shrinking the informal economy as alternative means of expanding the revenue base.
Korea's informal economy remains relatively large by advanced-country standards. Strengthening tax compliance and reducing informal economic activity could provide additional fiscal resources without raising statutory tax rates.
The report argues that successful long-term tax reform requires a comprehensive approach that simultaneously addresses efficiency, equity, revenue sustainability, and public acceptance rather than relying on piecemeal policy adjustments.