Half of individuals, businesses pay no income tax

By Choi Sung-jin

Half of Korean people and businesses pay no income tax or corporate tax, government officials and a tax think tank said Monday.

According to the Ministry of Strategy and Finance and the Korea Institute of Public Financing, the share of wage earners whose income fell short of taxation peaked at 48.7 percent in 2005 and had since fallen by 2 percentage points on annual average to 32.4 percent in 2013.

But the share sharply rebounded to 45.7 percent in 2013 and to 48.1 percent last year, as 8.02 million out of 16.69 million wage earners did not pay taxes, the officials said. When the government changed its tax exemption system in 2013, some low-income people strongly resisted, describing it as a “tax bomb” and forcing the government to revise it toward benefiting everyone, they said.

To prevent the increase in the tax burden on the mid-income brackets, the government expanded tax exemptions for them, especially those with an annual salary of 40 million won ($35,970) or less. However, the ratio people in the middle-income bracket with an annual salary of 40 million won to 50 million won who fall short of taxation also increased because of the excessive tax exemption, they said.

The ratio of middle-income people exempted from taxation rose from 1.5 percent, or 18,475, in 2013 to 17.8 percent, or 235,144, in 2014, a 13-fold increase, according to the institute.

Even the ratio of tax-exempt individuals whose annual salary is 100 million won or more rocketed 27 times from 0.01 percent (53 people) to 0.27 percent (1,441 people), it said.

“The sharp increase in the number of people whose incomes fall short of taxation is seriously damaging the principle of ‘taxes for all people,’” said Kim Jae-jin, a fellow at the government think tank.

Also, Korea’s income redistribution through taxation was very low compared with the average of the Organization for Economic Cooperation and Development, officials said.

According to the “2015 OECD Revenue Statistics,” the average pretax Gini coefficient of 30 OECD member nations stood at 46.9 percent last year and their after-tax Gini coefficient was 30.7 percent, indicating the coefficient fell 16.2 percentage points through taxation and meaning income redistribution effect through taxation was 16.2 percentage points.

But Korea’s pretax Gini coefficient was 33.8 percent and its after-tax Gini coefficient was 30.7 percent, meaning the nation’s income redistribution effect through taxation stood at a mere 3.1 percentage points, they said.

The situations are little different with corporate income tax.

According to the Economic Reform Research Institute, the share of businesses paying corporate taxes continued to drop, from 56.9 percent in 2007 to 52.9 percent in 2013. In 2014, out of 550,472 business corporations obligated to make taxation reports, only 290,290 companies, or 52.7 percent, paid taxes.

This was because the government exempts corporate tax payments for companies recording operating losses. A total of 190,904 companies, or 34.7 percent, paid no taxes, benefiting from this rule.

However, of the 359,568 companies that recorded operating profits, 69,278 paid no taxes because their investments in research and development, or other job-creating projects were exempt from taxes, the institute said.

Only 37.5 percent of large businesses paid corporate taxes, far fewer than the comparable share of 56.2 percent for smaller businesses, mainly because large companies’ R&D investment and employment were far larger than those of small and midsize enterprises.

The government has been reluctant to revise earned income and corporate income tax laws, but civic groups say the time has long past for the nation to close the tax loopholes for large businesses and wealthy individuals.

“Legislative measures are needed to introduce minimal income tax and reduce tax cuts for high-income people,” said Solidarity for Economic Reform. “All wage earners need to pay even a minimal level of income taxes, and the current tax exemption system in favor of high-income people should be overhauled.”