Joseyeon: "Individual Entrepreneurs Earning Over 500 Million Won Have High Tendency for Tax Avoidance and Evasion"

[Asia Economy Sejong=Reporter Son Seon-hee] A study has found that the group of high-income self-employed individuals earning over 500 million KRW annually has a high level of access to tax avoidance and evasion methods. A national research institute has suggested that tax compliance among this group should be improved.

The Korea Institute of Public Finance (KIPF) stated in its Tax and Finance Brief report published on the 8th, titled "A Study on the Efficiency Cost of Income Tax," that "As a result of estimating the taxable income elasticity and efficiency cost due to income tax rate increases, a statistically significant positive taxable income elasticity was observed among self-employed individuals."

Taxable income elasticity is a concept that measures how sensitively taxpayers' labor supply and reporting behavior change in response to tax rate changes. A high taxable income elasticity in a specific group indicates a high level of access to tax avoidance and evasion within that group.

Furthermore, when taxable income elasticity is high, a tax 'efficiency cost' occurs, which refers to the portion of the social surplus reduction caused by taxation that is not offset by the government's increased tax revenue.

The current income tax system applies a progressive tax rate structure as the taxable base increases. For taxable income exceeding 500 million KRW, a 42% tax rate applies, and for income exceeding 1 billion KRW, a 45% tax rate is applied.

The problem is that applying such high tax rates also increases the marginal efficiency cost. The marginal efficiency cost was highest at 39.7% in the taxable income bracket exceeding 500 million KRW. This means that for every additional 100 KRW of tax revenue, an efficiency cost and excess burden of 39.7 KRW occur.

Kwon Sung-oh, a senior researcher at KIPF who authored the report, said, "Strengthening taxation can cause unintended social costs due to changes in taxpayer behavior," adding, "When formulating policies, analysis of taxpayer behavior changes and the resulting efficiency costs should be conducted in advance and considered." He also added, "An appropriate policy response to the high taxable income elasticity is to increase tax compliance," emphasizing that "policy interventions that enhance tax compliance, such as the Honest Reporting Verification System, are necessary."

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