Calls for inflation-adjusted income tax revision gather pace

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Korea should revise its income tax rules to reflect increases in the price of goods and services, market watchers said Monday.

Central to the renewed calls is the 1.2 percent contraction in the real income of households last year, despite the country's robust growth of 1.4 percent.

The retreat in the year-on-year inflation-pegged figure, excluding taxes, borrowing costs and other expenses was the first in 14 years. The previous similar contraction occured in 2009, at the height of the global financial crisis.

Korea's per capita nominal gross national income climbed to 47.25 million won ($34,712) last year, up 51 percent from 31.34 million won in 2013. The country's headline inflation surged 20 percent in the same period. The income tax rate has remained unchanged since 2010.

Experts say many Koreans end up paying tax based on higher nominally measured taxable income, as best encapsulated by "bracket creep," whereby taxpayers are moved into higher income brackets or have their tax benefits reduced. Otherwise known as fiscal drag, this explains reduced consumer spending resulting from increased taxes. It could dampen aggregate demand, leading to deflationary pressures.

The National Assembly Research Service thus advised the newly formed Assembly to deliberate on introducing bills for revising the inflation-pegged income tax.

Similarly, an association of the country's tax accountants recommended on July 4 that Korea establish a system in which tax brackets, rates, deductibles and credits are correlated to headline inflation.

However, the Ministry of Economy and Finance remains in a bind due to concerns about a further decline in tax revenue amid sharper-than-expected shortfalls.

The revision will, the ministry cautions, end up expanding the base of tax-exempt income earners. About 33 percent of Korea's workers in the earned income demographic remained tax-exempt in 2022, more than double the 17.3 percent of Japan.

According to a Korea Development Institute (KDI) report, the outdated status quo is left unrevised at the cost of taxpayers' purchasing power.

"An increase in nominally based taxable income means taxpayers are essentially paying higher taxes they didn't necessarily agree to," the report said.

"The middle class is right to feel strained due to extended periods of high inflation over the past few years, especially since national pension service premiums are certain to inch up among other social security spending amid ultra-low birthrates."

Korea is among the few advanced economies with outdated tax codes without consideration for inflation, unlike 22 members of the OECD, including the United States, the United Kingdom, Canada and France.

The ministry is expected to unveil a set of tax law revisions late this month as part of its annual policy directive.