In an effort to pay for the country’s welfare state, South Korea’s President Moon Jae-in announced that, starting in 2018, wealthy companies would have to pay 25 percent of corporate income tax on annual revenue greater than 179 million dollars.
This 3 percent tax increase would affect the country’s 129 richest companies and would boost South Korea’s governmental revenue by an estimated 2.31 billion dollars in 2018.
Lee Sang-jae, an analyst with Eugene Investment & Securities, does not expect this reform will lead to massive capital flight.
, “It will be a hit to a very small number of wealthy individuals and big companies…Simply put, the rich here won't be able to make the same money abroad.”
However, President Moon-Jae-in’s opposition, the Liberal Korea Party (LKP), has stated these changes will hinder the country’s economy.
The LKP asserted
that “raising the corporate tax is raising taxes on the people and will hold businesses back while reducing the number of jobs available.”
Furthermore, Bae Sang-geun, director of the Federation of Korean Industries (FKI), expressed some concern over this revision and urged the government to think it through.
, “Some industries are facing difficulties while external uncertainties are increasing such as growing protectionism and a decreasing growth outlook in the United States. We hope the government and the National Assembly will discuss the matter thoroughly, taking into account investment, job creation and global competition to cut tax rates.”
South Korea to Raise Capital Gains and Income Tax Too
According to Reuters, the South Korean government also announced
“it will raise capital gains taxes on owners of multiple homes in Seoul and Busan, and hike income tax on earnings exceeding 500 million won ($445,600) a year to 42 percent, up from 40 percent currently.”
In particular, the capital gains tax on property owners would be put in place to curtail speculative purchases and reign in a rapidly growing property market.
In addition to the aforementioned tax hike on capital gains, The Financial Times reports
that property owners in those areas “will be prevented from borrowing more than 40 per cent of the property value, and mortgage payments will be capped at 40 per cent of the buyer’s annual income.”
As quoted in The Financial Times, economist Lee Sang-jae said
, “There are concerns of a bubble forming in the property market and this could lead to household defaults and financial risks if the economy slows further and interest rates rise.”
“The new measures underline the government’s determination that it will not use the sector as a tool to prop up the economy,” he added
Furthermore, the hike in income tax on earnings above the aforementioned threshold of approximately 446 thousand dollars “is expected
to affect some 93,000 wealthy people, including 20,000 highly-paid workers and 29,000 individuals who inherited their fortune.”
South Korea’s Tax Hikes to Deal with Aging Population & Help the Lower Class
This is all part of an effort to deal with the country’s rapidly aging population, one experts ascertain will become super-aged by 2026.
Talking about this move, Finance Minister Kim Dong-yeon said
, “We have decided that an adjustment in tax rates is needed to secure the nation’s tax revenues.”
Additionally, Dong-yeon explained
that this tax hike “could boost income for the socially marginalized and increase investment on manpower, and help create a virtuous cycle in the economy.”
Despite all of these efforts to boost revenue, Jeong Se-eun, a Professor in Economics at Chungnam University, believes the South Korean government needs to ramp up taxation even further to accomplish what it has set out to do.
“It is doubtful whether the government's plan to spend 178 trillion won will be enough to solve problems such as job creation, income redistribution and the ultra-low birthrate. The government will have to prepare funding for such tasks by more aggressively increasing taxes,” Se-eun said
Besides the tax hikes, new policies will be pursued to benefit the lower class, as well as small-and-medium enterprises (SMEs).
The Korea Herald says
this package will also provide employees “a 10 percent increase in their employment subsidy and an extra 2 percent tax deduction on their monthly rent.”
Furthermore, SMEs will gain
“an extra tax deduction of 5-7 million won, depending on business size, for every new recruitment.”
These planned policies need to be approved by the Presidential cabinet in August and then reviewed by the National Assembly in early September.
Do you have any thoughts on South Korea’s revamped tax policy? Let us know with a comment!
Tax tables included above courtesy of Pulse by Maeil Business News Korea