Tax reform plan likely to undergo drastic adjustment by opposition

Senior officials at the Ministry of Economy and Finance give a preliminary press briefing on the tax code revision proposals at Government Complex Sejong, July 22. Yonhap

The tax code revision proposals made by the government are anticipated to undergo drastic changes when the proposals are submitted to the opposition-dominated National Assembly by Sept. 2.

Announced on July 25, the proposals require amendments on 88 percent or 168 of the 191 tax laws. Therefore, approval from the main opposition Democratic Party of Korea (DPK) is inevitable for the government’s tax reform to go as planned.

Under the circumstances, the DPK is arguing that the tax reform plan is “largely intended to cut massive taxes for wealthy individuals in the name of offering incentives for the middle class.”

The DPK’s stance, according to political experts, is to “not let the government take initiatives completely concerning issues that draw public interest.”

The DPK’s opposition centers on the inheritance tax, an additional tax on controlling shareholders and the capital gains tax on financial investments.

The inheritance tax has been facing calls for an overhaul as it has changed little for over the past 25 years, resulting in an undue tax burden on the middle class by not accurately accounting for their wealth accumulation over time.

While the DPK has partly agreed on the need for an overhaul, it argues the 2024 tax code revision “goes too far to advocate for the haves instead of the middle class.”

The party refers to the government’s plan to increase the exemption for inheritance per child to 500 million won ($364,600) from the current 50 million won.

The party deems that the 10-fold increase is excessive and that exemption should be doubled to only 100 million won.

It is also strongly against the government’s plan to lower the top rate of inheritance tax from 50 percent to 40 percent.

Korea’s top tax rate is the world’s second-highest level after Japan, prompting calls for a revision to follow global standards, as it could hinder succession at family-owned businesses.

But the DPK says easing the rate is not necessary, arguing “middle- or lower-income households don’t have corresponding wealth anyway.”

To facilitate business succession, the government wants to scrap an extra 20 percent tax imposed on controlling shareholders for holding the stocks.

The DPK points out that many of the beneficiaries will be members of chaebols or family-controlled conglomerates who “can afford to pay tax to retain their business.”

Concerning the capital gains tax, the government seeks to completely scrap the rule on financial investments after it was originally set to go into effect in 2023 but has been delayed to 2025.

The government’s measure is in tandem with small investors’ worries that the policy, although it targets a handful of wealthy investors, will have a negative ripple effect on the market and inflict losses on them eventually.

The DPK is not against dropping the capital gains tax for investors. But it says the measure should be “carried out only after going over adjustments.”