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Banks face growing burden as gov't doubles education tax, pushes bad bank funding
ATMs of major banks are seen in Seoul, June 22. Yonhap
By Jun Ji-hye
Banks face a heavier burden as the government doubles the education tax, despite lenders' active support of government-led initiatives such as the bad bank program in line with its push for mutual growth, industry officials said Tuesday.
The Lee Jae Myung administration’s tax reform measures, announced Thursday by the Ministry of Economy and Finance, propose doubling the education tax rate for major financial and insurance companies from 0.5 percent to 1 percent.
The 1 percent education tax will apply to financial and insurance companies earning over 1 trillion won ($720 million) in annual revenue. Around 60 firms are expected to be subject to the higher rate, with the change projected to generate an additional 1.3 trillion won in tax revenue.
In 2023 alone, the government collected about 1.75 trillion won in education taxes from the financial and insurance sectors.
The education tax is intended to support the development of educational infrastructure and improve teacher welfare. However, critics have long argued that banks and insurance companies are not directly connected to the education sector, making the tax inconsistent with the core taxation principle of "beneficiary pays."
Moreover, with the country’s school-age population having nearly halved over the last four decades due to the low birthrate, critics question whether it remains appropriate to levy the tax on financial firms, especially when it appears to contradict fundamental principles of taxation.
In light of these concerns, the banking industry has urged the government to either abolish the education tax or revise how the collected money is used to better align with its intended purpose.
In a report submitted to the presidential state affairs committee in June, the Korea Federation of Banks stated, “The education tax should have a clear link between revenue and spending. But such a connection is weak in the case of financial and insurance firms. The tax should be either eliminated or revised in line with the benefit principle.”
Despite lenders’ requests, the government moved forward with the tax hike, prompting frustration and concern within the industry.
“The financial sector is already shouldering numerous responsibilities, including the bad bank initiative and assistance programs for small business owners and the self-employed. This increase only adds to our existing burdens,” an official in the banking sector said.
The banking sector is participating in the government’s debt relief program through the bad bank initiative and is expected to contribute about 350 billion won to 360 billion won out of the total 400 billion won in funding.
Industry insiders also emphasized that banks have already been actively giving back to society through voluntary programs.
Between last year and the first half of this year, banks allocated some 592 billion won to such efforts, achieving 96 percent of their target.
The disbursed funds include 202 billion won to support small business owners and 159 billion won for young people and the financially vulnerable.