[Lee Administration's First Budget] Tax Expenditures for Reductions Hit Record 80 Trillion Won... Reduction Rate Within Statutory Limit

The government is expected to grant a record-high amount of tax benefits to individuals and corporations next year, with tax exemptions and credits projected to reach 80.5 trillion won. Although the government is working to streamline tax expenditures to secure funding for major national policy initiatives totaling 210 trillion won, there are concerns that the structural increase in tax relief will make it difficult to achieve this goal.

According to the "2026 Tax Expenditure Budget Report" released by the government on August 29, next year's national tax relief is expected to amount to 80.5 trillion won. This figure is 4 trillion won higher than this year's estimate of 76.5 trillion won, marking an all-time high. When combined with fiscal spending of 728 trillion won, the government's effective expenditure for next year amounts to 808.5 trillion won. The government expects that structural increases in expenditures, such as deductions related to social insurance, higher child tax credits, and increased integrated investment tax credits, will contribute to the growth in tax relief.

If these projections hold, the national tax relief rate next year will be 16.1%. This is 0.4 percentage points below the statutory limit of 16.5%, which is calculated by adding 0.5 percentage points to the average national tax relief rate of the previous three years. In this case, the national tax relief rate will comply with the statutory limit for the first time in four years since 2022.

According to the National Finance Act, the Minister of Economy and Finance is obligated to make efforts to ensure that the national tax relief rate complies with the statutory limit. However, under President Yoon Suk Yeol's administration, the national tax relief rate exceeded the statutory limit for two consecutive years in 2023 and 2024.

This year as well, the national tax relief rate is expected to reach 16.0%, exceeding the statutory limit of 15.5% by 0.5 percentage points. This estimate is based on this year's revenue budget, and in the likely event of a revenue shortfall, the actual national tax relief rate for this year could rise even further. Since the statutory limit for the national tax relief rate is calculated based on the average of the previous three years, this would also raise the statutory limit for next year.

The government expects that, among the national tax relief granted to corporations next year, the share allocated to large corporations (those subject to cross-shareholding restrictions) will be 16.5%. The increase in the proportion of tax relief for large corporations, up from 15.7% this year, is attributed to rising expenditures related to investment and research & development (R&D) as a result of economic recovery and support for high-tech strategic industries.

Among the national tax relief granted to individuals, the share allocated to high-income earners is expected to rise slightly to 35.1%, compared to 34.8% this year. This increase is due to higher deductions related to social insurance, income deductions for credit card and other expenditures, and increased tax credits for pension accounts. In contrast, the share for middle- and low-income earners is expected to decrease slightly to 64.9%, down from 65.2% this year. As a result, the proportion of beneficiaries is expanding among high-income earners and large corporations.

President Lee Jaemyung has pledged to secure fiscal capacity through tax expenditure reform in response to rising fiscal demands caused by demographic changes. However, there are criticisms that strong opposition from stakeholders and the structural upward trend in tax relief will undermine the effectiveness of such reforms.

In the first tax reform plan announced by the Lee Jaemyung administration last month, only 16 expiring tax expenditures were adjusted, resulting in an average annual revenue effect of just 900 billion won. In addition, only six tax expenditures are set to expire (excluding one that is being adjusted or reinstated), which is actually one less than last year, when seven expired.

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