[Why&Next] 'Bujagamse' Hurdle... One Month to Deadline, Tax Law Revision Stalls

Democrats "Will Block Corporate Tax Cuts"
One Month to Deadline, Review Has Not Started
Disputes Between Ruling and Opposition Over Property Tax Relief Plan

[Asia Economy Sejong=Reporter Kwon Haeyoung] Although the deadline for reviewing the Yoon Seok-yeol administration's tax cut plan, the '2022 Tax Reform Plan,' is just one month away, it is understood that progress is still slow. On the 7th, the National Assembly began reviewing next year's budget, and while it should proceed with the Yoon administration's tax reform plan accordingly, it has yet to form even the Tax Subcommittee to review it. Even if the Tax Subcommittee is formed, there are still many hurdles ahead. The main opposition party, the Democratic Party of Korea, is opposing the corporate tax cuts and comprehensive real estate tax relief as 'tax cuts for the rich,' making significant difficulties inevitable during the National Assembly's review process.

According to the Ministry of Economy and Finance, the National Assembly's review of the tax law amendment bill must be passed in line with the confirmation of next year's budget by December 2. However, the Tax Subcommittee for discussing the tax law amendment bill linked to next year's budget has not even been formed yet, making it highly likely that the deadline will be missed. A Ministry of Economy and Finance official said, "Usually, the ruling party's secretary of the Planning and Finance Committee serves as the chair of the Tax Subcommittee, but this time the opposition party demanded the chair position, causing a confrontation between the ruling and opposition parties, and the review of the tax law amendment bill has not even started." He added, "Even if the Tax Subcommittee is formed and the review begins, there are so many contentious issues that the review is expected to continue until the end of December."

Corporate Tax, the Biggest Point of Interest

The core of the government's proposed tax law amendment is the corporate tax cut. The 'Partial Amendment to the Corporate Tax Act' aims to lower the top tax rate from the current 25% to 22%, and apply a 10% tax rate on taxable income up to 500 million KRW for small and medium-sized enterprises and mid-sized companies. The government’s rationale for pushing the corporate tax cut is to increase companies' investment capacity, thereby boosting investment, employment, and economic vitality. According to the Ministry of Economy and Finance, after the corporate tax cut in 2008, facility investment increased by 23.2% in 2010 compared to the previous year, and the employment rate rose by 0.4 percentage points. The average top tax rate among OECD member countries (excluding local taxes) has also been trending downward, from 22.4% in 2017 to 21.2% in 2021. As Korea’s tax competitiveness weakens, six major economic organizations, including the Korea Chamber of Commerce and Industry, issued a joint statement urging the National Assembly to promptly pass the Corporate Tax Act amendment.

On the other hand, the Democratic Party of Korea insists that the corporate tax cut is a tax cut for the wealthy benefiting only large corporations and vows to block the government's push. In particular, they plan to block the corporate tax cut to secure additional resources and allocate them to livelihood projects such as local currency or the revival and increase of rental housing budgets. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho previously stated, "There is no Plan B," and said he would persuade the opposition party to pass the original bill, but a rough path is expected during the National Assembly discussions.

Comprehensive Real Estate Tax Also a Key Issue

The discussion on the 'Partial Amendment to the Comprehensive Real Estate Tax Act' is also a major point of interest. The government's proposed amendment includes three main points: ▲ lowering the maximum tax rate (from 6% to 2.7%) and unifying the tax rates ▲ raising the basic and special deduction amounts (from 600 million KRW to 900 million KRW, and from 1.1 billion KRW to 1.2 billion KRW, respectively) ▲ unifying the tax burden cap (from 150-300% to 150%). Currently, the comprehensive real estate tax is levied differently depending on whether the taxpayer is a multi-homeowner or a corporation, but the new plan aims to impose the tax based on property value. The goal is to appropriately ease the tax burden while normalizing the tax system, which has been distorted into a 'punitive measure,' without affecting housing market stability.

However, the comprehensive real estate tax relief plan is also criticized by the Democratic Party as a tax cut for the wealthy, along with the corporate tax cut, making the passage of the government's original bill practically impossible. The Democratic Party even blocked the government's plan to temporarily raise the comprehensive real estate tax deduction for one-homeowners this year (from 1.1 billion KRW to 1.4 billion KRW), reversing their campaign pledges from the presidential and local elections. Additionally, the Democratic Party opposes the amendment to the financial investment income tax, which raises the capital gains tax threshold on domestic listed stocks held by major shareholders from 1 billion KRW per stock to 10 billion KRW, criticizing it as 'tax exemption for the ultra-rich' and opposing it as party policy.

Disputed Scale of Tax Revenue Reduction

There is also expected to be ongoing debate over the economic effects and fiscal impact of the 'tax cuts,' the key theme of the Yoon administration's tax law amendment. The government expects tax revenue to decrease by a total of 60.3 trillion KRW over the next five years (2023?2027) due to this reform. Specifically, income tax is expected to decrease by 16.1 trillion KRW, corporate tax by 28 trillion KRW, securities transaction tax by 7.2 trillion KRW, and comprehensive real estate tax by 7.9 trillion KRW. The government’s argument is that by enhancing private sector vitality through tax cuts, the tax base can be expanded in the mid to long term. The annual tax revenue reduction is also only about 3% of the national tax revenue (approximately 400 trillion KRW).

On the other hand, some voices question the economic growth effects of the tax cuts and express concerns about fiscal deterioration. According to estimates by the National Assembly Budget Office, tax revenue is expected to decrease by a total of 73.6 trillion KRW over the next five years, 13.3 trillion KRW more than the government's projection. The Budget Office pointed out, "Theoretically, lowering corporate tax and expanding tax credits can increase investment and employment capacity and lead to economic growth, but recent changes in domestic and international economic conditions may limit the policy's effectiveness." It also warned, "Once tax rates are lowered, it is difficult to raise them again, raising concerns about fiscal soundness deterioration in the mid to long term." Furthermore, it emphasized, "Considering that countries including Korea are raising interest rates to reduce inflationary pressures, it is necessary to consider the policy combination of tax-cut type tax reform and tight monetary policy."

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