Presidential contenders’ tax cut promises raise concerns over revenue shortfall

Lee Jae-myung, second from left, the Democratic Party of Korea's presidential candidate, holds a meeting with office workers at a studio in Guro District, Seoul, April 30. Joint Press Corps

Tax cuts are a classic example of populist pledges, making a regular appearance in every election cycle. The upcoming June 3 presidential election is no exception, with leading candidates from rival parties once again competing through generous giveaways and tax cut promises aimed at winning voter support.

However, the focus on tax cuts without clear funding plans or comprehensive tax reform raises doubts about the feasibility of these pledges, especially given the current fiscal deficits.

Experts warn that implementing these pledges would likely lead to an expansion of national debt and place a heavy strain on state finances.

Democratic Party of Korea (DPK) candidate Lee Jae-myung and People Power Party (PPP) candidate Kim Moon-soo are both emphasizing income tax cuts for salaried workers in their election pledges.

In a Facebook post on April 2, Lee, who is leading in polls, suggested the possibility of a tax cut, noting that the burden of earned income tax as a percentage of GDP rose from 1.6 percent in 2015 to 2.4 percent in 2024.

"Such increases fuel ongoing complaints that wage earners are unfairly targeted," he wrote.

On April 30, when Lee met with office workers, he also said that while wages appear to rise nominally, they often fail to keep pace with inflation.

"When nominal wages increase, the tax base grows, pushing salaried workers into higher brackets. This leads to stagnant real wages but growing tax burdens," he said.

The main opposition party has also moved to revise the income tax law. A bill submitted by Rep. Cho In-cheul proposes an increase in the basic personal deduction from 1.5 million won ($1,000) to 2 million won.

People Power Party presidential candidate Kim Moon-soo speaks during a campaign committee event at the party's headquarters in Yeouido, Seoul, Monday. Joint Press Corps

PPP candidate Kim Moon-soo also announced tax cut proposals on April 30, citing the impact of rising inflation on real wages.

Kim pledged to support the middle class, which he argued sustains the economy, through tax reforms aligned with "global standards." He suggested the implementation of an inflation-adjusted system for comprehensive income taxes.

He also proposed increasing the basic personal deduction to 3 million won per person, which is a more generous approach than the DPK’s proposal.

There has been considerable discussion about the need to address the rising burden of earned income taxes, which have risen sharply in recent years.

A recent report from the National Assembly Budget Office revealed that earned income tax reached approximately 60 trillion won in 2023, more than 2.4 times the 25 trillion won in 2014. This reflects an annual growth rate of about 9 percent.

However, the reality of pushing for income tax cuts is far from straightforward, as it is becoming increasingly clear that national debt will grow at an accelerated rate due to two consecutive years of substantial tax revenue shortfalls.

According to the International Monetary Fund’s fiscal review, published in April, Korea’s general government debt-to-GDP ratio is expected to reach 54.5 percent this year, marking the first time it will exceed the average of 54.3 percent for 11 non-reserve currency advanced nations.

The country’s debt ratio has been surging since 2020 due to expanded fiscal measures for COVID-19 relief, economic recovery and increased welfare spending.

The Ministry of Economy and Finance estimated that the national debt will total 1,277 trillion won this year. As a result, the government’s fiscal deficit is expected to reach 77.7 trillion won this year, following a deficit of 91.6 trillion won in 2024.

Experts criticized the reckless tax cut promises made by politicians focused solely on gaining votes.

“A strange bond has formed between the DPK and the PPP in terms of tax cuts,” said Kim Hyun-dong, a professor of business administration at Pai Chai University. “Compared to other countries, Korea already has a relatively low tax burden. If we cut taxes, this will inevitably expand the state revenue shortfalls.”