This study aims to find ways to reform Korea’s tax system by analyzing its problems, policy tasks and suggestions.
The current income tax system of Korea has a variety of problems, such as its relatively low proportion of income tax, inequality of taxation across different income sources, disparity between real and nominal tax rates, tax evasion, distortions from inflation and those in tax collection/payment procedures. Korea should devise a new income tax system based on a combination of the following three principles of taxation: 1. Taxing every income and not allowing any non-taxation, exemptions or deductions 2. Taxing the sources of incomes applying uniform tax rate in their payment stage, not receipt stage. 3. Refunding a certain amount of collected tax revenues without regard to taxpayers’ level of income.
Tax incentives are policy tools through which government can adjust the flow of resources in private sector by affecting relative price system. Exports and industrial investments were the two areas where the most generous tax incentives were given in Korea’s development process. Choosing a suitable economic development strategy is one of the most important decisions that a country has to make. Tax incentives should be used in a more factor-neutral manner to be efficient.
Important issues regarding taxation of corporate source income include: excessiveness of the tax burdens, equality between major and small shareholders, and neutrality of taxation towards the corporations’ dividend policies. Although corporate source incomes are generally under-taxed, inequality of tax burdens between different shareholders is serious, and prevents the current system from being neutral towards dividend policies. Recommended policy directions include abolishing or revising the minority shareholder system and increasing tax deductions on dividends.
Dividend incomes have been more heavily taxed than retained earnings. Tax codes have treated borrowing more favorably than earnings retaining, which, in turn, was favored over issuance of new shares. All of these factors negatively affected corporate financial structures, which are also damaged by insufficient domestic capital, growth-driven economic policies, fragile capital markets, careless investments of firms, irrational lending behaviors of financial institutions, low profitability and high dividend payout ratios. These various factors should be taken into account in devising proper policies.
Korea’s tax system is getting increasingly complicated as it strengthens complex taxation schemes to achieve vertical/horizontal equity, and introduces many tax practices used in advanced economies especially with procedures or remedy systems. It should be re-directed in a more realistic way, taking into account the county’s social and cultural elements. Tax administration should be run on the principle of no taxation without law. Tax payers should actively cooperate with the tax authorities so that the tax payment by self-assessment can be settled.
Major issues that face local tax system include expanding its sources of taxation, actual guarantee of taxpayers’ sovereignty, and raising equality in the system. The proportion of Korea’s property tax in the whole tax system is very low compared to Japan or Taiwan, due to the difference in tax rates and objects of taxation. The Korean government should seek to expand objects of taxation, simplify the current complicated tax rates and rationalize the tax base. Special deductions should be given to agricultural incomes, while general income tax is imposed on them, to achieve equity. Local taxes on agricultural lands should be integrated into property tax, and the revenue deficits resulting from the integration should be compensated for through local grant taxes.
한국세제의 주요정책과제와 개선방향
서울 : 한국개발연구원
|Series Title; No||연구보고 / 84-01|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Macroeconomics|
|Holding||KDI; KDI School|