The Korean tax system is fairly effective in generating sufficient public revenues without weakening the competitive position of the national economy. Tax instruments are used to nurture FDI, R&D, and human resources development. Its main weakness, however, is equity.
Compared to other OECD countries, the tax burden in Korea is very low. As of 2009, tax revenue was about 20% of GDP (this rises to 27% after the inclusion of social security contributions). Tax revenue has been growing slowly, and is likely to increase farther in the future, as social security contributions have increased relatively fast since the middle of 1990 and will likely continue to do so.
In comparison with other OECD countries, Korea also has a low tax burden on labor income. The average tax wedge (average income tax plus employee and employer social security contributions minus cash transfers, as a percentage of total labor costs) was below the OECD average for all households in 2009.
As of 2009, there were 14 national taxes and 15 local taxes. Local tax represents about 20% of total tax revenue. Direct tax (personal income taxes (PIT) and corporate income taxes (CIT)) revenue share is about 40%; indirect taxes (especially VAT) are responsible for about 55% of national tax revenues. The share of total taxes accounted for by personal income taxes and social security contributions is the lowest among OECD countries, but Korea’s corporate income tax share is among the highest. Distribution of the PIT tax burden in Korea is comparable to that in the United States. CIT payment is fairly concentrated, with about 1,000 companies (0.3% of the total) paying 75% of the country’s total CIT.
Taxes raise revenues adequate to the government’s needs, and do not impede competitiveness. Korea has one of the lowest tax rates in the OECD. Although taxes on business are relatively high compared to personal income taxes, they do not seem to reduce overall competitiveness. The strong reliance on the value added tax gives the tax system an inequitable, regressive nature, and lessens its ability to improve equity.
One of the major reasons for the weak income tax base is relatively high number of self-employed individuals, and the low levels of income tax paid by this group; another is the sizable income-tax deduction for wages and salaries. However, in the last two years, the Lee administration has further weakened the ability of the tax system to achieve equity by reducing progressive income taxes and real-estate taxes paid by the relatively wealthy. Taxes on problematic consumption items such as energy or cigarettes remain relatively low, and the government has so far failed even to discuss an ecological tax reform.
National Tax Service 2009 (Statistical yearbook of national tax), Korea.
OECD, 2006, Tax Administration in OECD and Selected Non-OECD Countries. Comparative Information Series.
Kim, Jyunghun, 2008: Tax policy in Korea: Recent changes and key issues, Seoul: Korea Institute of Public Finance, unpublished paper.
OECD 2009, Reforming the tax system in Korea to promote economic growth and cope with rapid population ageing, http://www.oecd.org/topicdocumentlist/0,3448,en_33873108_33873555_1_1_1_1_37427,00.html