[2020 Tax Law] Hong Nam-ki: "Top Income Tax Rate Raised to 45% but Tax Neutrality Maintained... Hope for No Tax Increase Debate"

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki reading the announcement at the pre-briefing for the "2020 Tax Reform Bill" held at the Government Sejong Complex on the afternoon of the 20th. From the left, Joo Tae-hyun, Director General of Customs Policy at the Ministry of Economy and Finance; Ko Kwang-hyo, Director General of Income and Corporate Tax Policy; Lim Jae-hyun, Director General of the Tax System Office; Deputy Prime Minister Hong; Kim Tae-joo, Director General of Tax Policy Coordination; and Jung Jung-hoon, Director General of Property and Consumption Tax Policy. (Photo by Ministry of Economy and Finance)

[Asia Economy Reporter Moon Chaeseok] The government has introduced a new tax bracket for taxable income exceeding 1 billion KRW, raising the top income tax rate from 42% to 45%. Deputy Prime Minister and Minister of Strategy and Finance Hong Nam-ki emphasized that since investment tax credits and other measures were also implemented, the overall revision is tax-neutral rather than a tax increase. However, controversy over a 'wealth tax increase' is inevitable as it targets high-income earners.

On the 22nd, the Ministry of Strategy and Finance held the Tax System Development Deliberation Committee at the Bankers' Hall in Myeongdong, Seoul, and finalized and announced the '2020 Tax Law Amendment' which includes the increase of the top income tax rate.

The following are key Q&A excerpts from an interview with Deputy Prime Minister Hong and Im Jae-hyun, Director of the Tax Policy Bureau at the Ministry of Strategy and Finance, held with reporters on the 20th before the announcement of the amendment.

Q. What is the reason for raising the top income tax rate to 45%?

A. (Hong Nam-ki) While first-quarter earned income decreased significantly, the income quintile ratio worsened considerably. Additionally, amid the COVID-19 crisis, we decided to impose the top tax rate very selectively on high-income earners who are relatively less affected and have the capacity to pay taxes. Only 0.05% of comprehensive wage taxpayers, about 11,000 people, will be affected by the 45% top tax bracket. This is expected to increase tax revenue by about 900 billion KRW. Among the seven countries in the so-called '3050 Club' (per capita income over $30,000 + population over 50 million), including Japan, France, Germany, and the UK, similar tax structures are applied.

Q. Recently, President Moon Jae-in mentioned the investment enthusiasm of individual investors and advanced the timing of the securities transaction tax increase. However, there is no roadmap for its abolition.

A. (Hong) Regarding financial investment taxes, last month we announced plans to reduce the rate by 0.02 percentage points in 2022 and by 0.08 percentage points in 2023, totaling a 0.1 percentage point reduction. This time, to further encourage individual investors' participation in the stock market, the 0.02 percentage point reduction scheduled for 2022 was brought forward by one year to next year. Currently, only the reductions of 0.02 percentage points in 2022 and 0.08 percentage points in 2023 have been decided.

Q. There are concerns about moving toward a tax increase policy amid ongoing economic contraction due to COVID-19.

A. (Hong) While the top income tax bracket adjustment will increase tax revenue by 900 billion KRW, the amendment also includes investment tax credits and relief for low-income earners. Overall, we strived to make the tax reform 'tax-neutral' by balancing increases and decreases. It is inappropriate to call it a tax increase based solely on the items where revenue increases.

Q. Many tax exemptions and reductions set to expire this year have been extended. Overall, the proportion of wage income tax payments and exemptions remains high. Does maintaining exemptions while raising rates mean the government is abandoning the principle of 'broad tax base, low tax rates' upheld for over 20 years?

A. (Hong) The fundamental principle of 'broad tax base, low tax rates' will likely be maintained overall. However, the partial extension of tax exemptions reflects the difficult economic situation. Regarding tax burden incidence, the increase in tax burden on high-income earners and large corporations due to the top income tax rate adjustment is estimated at about 1.87 trillion KRW, while the tax relief effect for low- and middle-income earners and SMEs is about 1.77 trillion KRW. The increases and decreases are nearly balanced. Although a significant portion of the population currently does not pay income tax, the government will continue to work steadily to address this gradually.

Q. President Moon said there will be no lifting of the Greenbelt (development-restricted areas). Could you share Deputy Prime Minister Hong's stance on this?

A. (Hong) The policy has already been announced, so I will not comment further. The housing supply plan will be announced soon, and that will serve as the response.

Q. From 2021 to 2024, the comprehensive real estate tax rate will increase, but the increase is only about 900 billion KRW. You mentioned the income tax increase effect is also 900 billion KRW. Is this 900 billion KRW per year or the total over the period?

A. (Im Jae-hyun) The new 45% top income tax rate for income exceeding 1 billion KRW will generate an additional 900 billion KRW in tax revenue. Taxpayers will pay this starting in 2022 for income earned next year, so 900 billion KRW will be collected in 2022 and again in 2023. Estimating revenue effects for the comprehensive real estate tax is challenging. We significantly strengthened the comprehensive real estate tax and capital gains tax on multi-homeowners. The intent is not to maintain the current multi-homeowner status and simply increase taxes, but to encourage multi-homeowners to sell properties and reduce holdings. If we apply the increased tax rates to the current multi-homeowner status without change, the numbers would be excessively high, which is inaccurate. We have consulted with the Ministry of Land, Infrastructure and Transport on this. The difficulty lies in predicting how many properties multi-homeowners will put on the market after the tax increase. We assume some properties will be sold, so the comprehensive real estate tax rate was raised accordingly. The increase is not cumulative annually.

The terms 'net method' and 'cumulative method' are not official but commonly used. The net method shows how tax revenue changes compared to the previous year after the tax law amendment. The cumulative method assumes the amendment's effects continue in subsequent years indefinitely unless revised or repealed. To simplify, the cumulative method often considers a 5-year period. Again, the tax revenue effect was calculated using the net method, not the cumulative method.

Q. The financial tax reform was initially designed to be revenue-neutral by lowering the securities transaction tax rate and fully introducing capital gains tax, but it was revised. The reduction in securities transaction tax is 2.4 trillion KRW, while the increase from expanded capital gains tax is 1.5 trillion KRW, a 900 billion KRW difference. Coincidentally, the increase from raising the top income tax rate is also 900 billion KRW. Can it be seen that the burden on individual investors was reduced, and the top income tax increase shifted the burden to high-income earners?

A. (Im) I have never thought that way. It seems coincidental.

Q. The basic exemption for capital gains tax on listed stocks was raised from 20 million KRW to 50 million KRW. Since only about 2.5% are subject to taxation, it is embarrassing to say that full taxation on listed stocks has begun. Is there a plan to lower the exemption level once the market stabilizes?

A. (Im) We said the 50 million KRW basic exemption is large when introducing financial investment income taxation. We believe this is significant as it is the first time in Korea's income tax history that financial investment income is taxed. Previously, it was difficult to fully introduce taxation on listed stocks for various reasons, but now it has been implemented, which is meaningful. Regarding double taxation with transaction taxes, imposing income tax while also levying transaction tax could be criticized as double taxation despite different tax bases. However, Korea has only levied transaction tax without income tax until now. We are expanding income tax while lowering transaction tax. Looking at foreign cases, no country lacks both transaction tax and income tax; at least one is imposed. Originally, income tax is the stronger principle, but since it was difficult to impose, transaction tax was used as a supplement. Going forward, income tax will be imposed on amounts exceeding 50 million KRW, while amounts below that will still be subject to transaction tax only. Therefore, it is hard to call transaction tax on amounts below the exemption double taxation.

Q. The plan to abolish or reduce the securities transaction tax has been adjusted. Is the basic stance of not finalizing abolition still valid?

A. (Im) It is difficult to comment on plans to reduce or abolish it at this time. There is ongoing debate about the necessity of transaction tax, and many support its continuation.

Q. Deputy Prime Minister Hong said it is not a tax increase, but as seen in tax burden incidence, the trend of taxing the wealthy is clear. This trend has always appeared under the current administration. Is there a reason for maintaining this policy?

A. (Im) Views on taxing the wealthy vary. Is the opposite of taxing the wealthy 'tax cuts for the poor'? Deputy Prime Minister Hong emphasized that the tax law amendment will increase revenue by 67.6 billion KRW over five years. However, if calculated using the cumulative method rather than the net method, revenue actually decreases. The net method shows a 67.6 billion KRW increase, but the cumulative method shows a decrease. If the amendment aimed to tax the wealthy, the cumulative method should show a significant increase. Since it does not, it is hard to call it a tax increase. Using the cumulative method, it might even be criticized as a tax cut. Please judge based on the cumulative method figures.

Q. You said there are no changes to the real estate tax-related housing market stabilization measures. The policy strengthens taxation on speculative and multi-homeowners, while reducing burdens on non-homeowners and single-homeowners as actual users. After the announcement, there were talks about speculative demand among non-homeowners. Recently, speculative housing purchases by non-homeowners have increased. Will the benefits for non-homeowner actual users continue despite people buying homes for speculation?

A. (Im) In my opinion, it is difficult for the government to determine whether a non-homeowner acquiring a single home is for speculation or actual residence. It is not easy to decide which tax measures should regulate non-homeowners holding homes for speculative purposes.

This content was produced with the assistance of AI translation services.