Wealthy South Koreans and leading conglomerates potentially face a big hit from tax hikes proposed by the government, as President Moon Jae-in seeks higher revenue to fund rising welfare costs and make housing more affordable for the less privileged.
The government has asked the nation’s top 129 companies to pay 25% of corporate income tax from 2018, up from the current 22%, on taxable income of more than 200bn won ($179mn) a year.
The measure, pending parliamentary approval, will boost corporate tax revenue by 5% or 2.6tn South Korean won ($2.31bn) from the 2018 tax year.
The government also said it will raise capital gains taxes on owners of multiple homes in Seoul and Busan, and hike income tax on earnings exceeding 500mn won ($445,600) a year to 42%, up from 40% currently.
The tax hike on high-income individuals will affect about 93,000 salary earners and entrepreneurs, the finance ministry estimated. “It will be a hit to a very small number of wealthy individuals and big companies,” said Lee Sang-jae, an economist at Eugene Investment & Securities.
Lee doesn’t expect a flight abroad to avoid taxes.
“Simply put, the rich here won’t be able to make the same money abroad.”
The hike in top marginal corporate income tax would put South Korea on par with the average of the world’s 20 major economies, at 25.7%.
All the same, getting parliamentary approval poses a challenge for the government as Moon’s ruling Democratic Party only holds 40% of the 299 seats in the National Assembly.
The Liberty Korea Party in the opposition has already opposed the plans, saying: “Raising the corporate tax is raising taxes on the people and will hold businesses back while reducing the number of jobs available.”
To address growing income inequality, “those who are better off, and conglomerates could contribute more to achieve social integration”, Finance Minister Kim Dong-yeon said at an embargoed briefing.
“Spent well, it could boost income for the socially marginalised and increase investment on manpower, and help create a virtuous cycle in the economy,” Kim said.
The government wants to raise more revenue to cover rising social welfare costs as a rapidly ageing population creates long-term problems for South Korea’s economy.
South Korea is set to become a super-aged society by 2026, and has the fastest-rising average age among the Organisation for Economic Co-operation and Development (OECD) countries.
A super-aged society refers to nations where people of 65 years or older make up at least 20% of population, according to the United Nations.
Boosting household income is also an urgent task for the Moon Jae-in administration. Household income as a proportion of aggregate corporate income fell to 62.1% in 2016 and has fallen steadily from 69% in 1995, government data shows.
The ratio of household debt to disposable income is rocketing towards 190%, as weak income growth pushes Koreans to borrow more for housing and living expenses.
To reduce income inequality, the government plans to broaden its revenue base by taking more from the affluent and less from the poor.
The property curbs announced earlier in the day were the most stringent on record, and were partly aimed at flushing out speculators who have taken housing values beyond the reach of first-home buyers.
Another income tax revision proposed by the government seeks to apply income tax of 40% for annual earnings of 300mn won to 500mn, up from 38%, starting next year. A capital gains tax that is applied only to large shareholders will also be raised from next year.
Large shareholders will pay a 25% tax when they sell shares listed in the Korea Composite Stock Price Index (KOSPI) at a gain of more than 300mn won a year, up from current rate of 20%.
Capital gains tax will gradually be applied on a larger range of investors.
Currently, capital gains tax is only applied to large shareholders with a stake exceeding 1% or holding 2.5bn won worth of KOSPI-listed stocks.
Institutional investors will not be affected by the revised capital gains tax codes because they are subject to corporate income tax.
Companies hiring workers will receive tax exemptions proportional to the number of jobs created through 2020, with small- to medium-sized companies eligible for proportionately larger tax benefits than large businesses.
The revisions, which the finance ministry said would add 5.5tn won ($4.9bn) annually to government revenue, will be submitted to the National Assembly on September 1 for parliamentary approval.
Revision of 13 tax codes will need to be approved, the ministry said.