[Square] The Strengthened Earned Income Tax Credit System

[Jongseong Park, Professor, Department of Business Administration, Sookmyung Women’s University] The Earned Income Tax Credit (EITC) system is a work-linked welfare program introduced to encourage labor among low-income earners and support their income. First introduced by the United States in 1975, similar systems are currently operated in countries such as the United Kingdom, France, Canada, and New Zealand. South Korea became the first Asian country to adopt this system through the revision of the Restriction of Special Taxation Act in 2006. In the initial payment year of 2009, 590,000 households received a total of 453.7 billion KRW. Last year, the number of beneficiary households increased 7.3 times to 4.32 million, and the support amount grew tenfold to 4.4683 trillion KRW. The significant increase in both the number of beneficiaries and the amount of support over about a decade is due to efforts to establish the basic framework of ‘working welfare.’

The government has supplemented and expanded the EITC system several times. Initially, it targeted only wage earners, but now it has extended to business owners and religious income earners, with income criteria and payment amounts continuously raised. In 2017, the requirement of being homeless was abolished among eligibility criteria, and from 2019, the payment frequency was changed from once a year to twice a year to help alleviate financial droughts for low-income earners. Reviewing the government’s reform direction for the EITC system so far, it can be understood as ‘enabling more households to receive greater benefits more quickly.’

This year, the government also included improvement measures for the EITC system in the tax law amendment proposal. The 2022 tax law amendments related to the EITC system can be summarized into three main points.

First, the increase in the income ceiling for EITC eligibility. Considering the rise in minimum wage and median income standards, the government raised the income ceiling by 2 million KRW per household. Accordingly, the ceiling for single-person households increased from the current 20 million KRW to 22 million KRW, and for dual-income households, from 36 million KRW to 38 million KRW. It is expected that the amendment will increase EITC payments by about 260 billion KRW and expand the beneficiary pool by approximately 300,000 households. The significance of this amendment lies in enabling support for minimum wage workers in single-person households by raising the income ceiling.

Second, the shortening of the settlement period for semi-annual EITC payments. Currently, payments are made twice a year (income for the first half of the year paid in December of the same year, income for the second half paid in June of the following year), with settlement in September of the following year. Under the amendment, settlement will be conducted together with the second half income payment in June of the following year. This shortening of the settlement period is expected to reduce the burden of early payments and adjustments for overpayments.

Third, the introduction of electronic delivery for EITC decision notices. Upon the applicant’s request, the EITC decision notice can be sent via text message or email. This electronic delivery is expected to enhance applicant convenience and reduce administrative costs.

Simple financial support for low-income earners may inadvertently reduce their motivation to work, trapping them in the ‘poverty trap.’ In contrast, the EITC system is designed to provide greater subsidies the more one works, thereby promoting labor participation among low-income earners. In fact, numerous domestic and international studies have shown that the EITC system increases economic activity participation among low-income groups. It is hoped that this government reform will serve as a stepping stone toward the original goal of ‘escaping poverty through work.’

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