Government Emphasizes 'Social Solidarity' While Raising Top Income Tax Rate... How Much Has Distribution Worsened?

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is delivering opening remarks at the 53rd Tax System Development Committee held at the Bankers' Hall in Jung-gu, Seoul on the 22nd. Photo by Kang Jin-hyung aymsdream@

[Sejong=Asia Economy Reporter Joo Sang-don] "We intend to raise the income tax rate for ultra-high-income earners who have relatively more capacity, in order to strengthen social solidarity and the function of income redistribution."

This is the reason given by Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, as the Ministry of Economy and Finance decided to create a new tax bracket for taxable income exceeding 1 billion KRW and raise the top tax rate to 45%. The idea is to collect more taxes from the wealthy who have the ability to pay, and collect less from the vulnerable lower-income groups affected by the COVID-19 pandemic, which is considered fair taxation.

The government's recognition is based on worsening income distribution. In fact, the income quintile ratio, which divides the income of the top 20% (5th quintile) by that of the bottom 20% (1st quintile), increased from 5.18 times in the first quarter of last year to 5.41 times in the first quarter of this year, a rise of 0.23 points. A higher figure indicates more severe income polarization.

The deepening income inequality is due to a relatively larger decrease in income for the bottom 20% group. The 1st quintile income decreased by 1,000 KRW from 1,499,000 KRW in the first quarter of last year to 1,498,000 KRW. Earned income (wages, bonuses, etc.) was 513,000 KRW, down 3.3% year-on-year, and property income (interest, dividends, etc.) dropped by 52.9%.

On the other hand, the 5th quintile income rose by 6.3% from 10,491,000 KRW in the first quarter of last year to 11,158,000 KRW. This was due to increases in earned income (+2.6%), property income (+44.8%), and transfer income (pensions, etc. +18.2%), except for business income (-1.3%).

The increase in "disposable income," which is income minus non-consumption expenditures and available for consumption and savings, was also steeper for the 5th quintile. The 1st quintile's disposable income rose 3.9% year-on-year to 1,234,000 KRW, while the 5th quintile's surged 8.3% to 8,768,000 KRW.

The deficit household ratio, which is the proportion of households whose consumption expenditure exceeds disposable income, increased for the 1st quintile but decreased for the 5th quintile. Generally, the lower the income quintile, the higher the deficit household ratio, because consumption expenditure exceeds disposable income. The problem is that this ratio is rising for the 1st quintile and falling for the 5th quintile. The deficit household ratio for the 1st quintile increased from 46.0% in the second quarter of last year to 49.8% in the third quarter, 51.6% in the fourth quarter, and 53.0% in the first quarter of this year. Conversely, for the 5th quintile, it decreased from 12.0% to 11.3%, 9.2%, and 7.9% over the same periods.

Deputy Prime Minister Hong said, "During the COVID-19 crisis, the income quintile ratio in the first quarter worsened significantly," adding, "We have imposed the top tax rate very selectively on high-income earners who are relatively less affected by the pandemic compared to other groups and are believed to have the capacity to pay taxes."

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