In general, tax policy serves three functions: income redistribution, resource reallocation and stabilizing the economy. Since the financial crisis, the polarization of wealth has become more serious, and the importance of income redistribution has been highlighted. However, in Korea, the decrease of Gini coefficient from before-tax to after-tax is only 8.7%, which is far lower than the OECD average, 31.3%. This implies that the income redistribution through tax policy in Korea is far less effective compared to that in OECD countries.
In Korea, the income tax, inheritance/gift tax and property tax carry out income redistribution function mainly through progressive tax rates and deductions system. Especially, income redistribution undertaken by income tax system is highly important for the purpose of alleviating the problem of income polarization in terms of tax revenue and taxable base. However, individual income tax accounts for 3.6% of GDP in Korea, which is lower than OECD average, 8.4%. This signifies that the current income tax system in Korea is not functioning well to deliver effective income redistribution for various reasons.
In order to enhance the income redistribution and equity in taxation, our income tax system needs to be reformed towards the following directions. Firstly, its role as to achieve the income redistribution has to be performed more effectively. In Korea, income tax liability is largely reduced by income deductions, which provides more tax advantages to taxpayers with high income due to the difference in marginal tax rates: despite the same amount of deductions provided, those with higher tax rates take more tax benefits. This leads to deeper income polarization. Secondly, the scopes of income tax reductions and non-taxpayers need to be tapered off after careful review and restructure of current exemptions/reductions system. We have various deductions and credits available for income tax which results in unnecessarily high tax-free income band and large number of people with no income tax liability. Also, income tax is with the largest tax reductions compared to other national taxes. Thirdly, the gap between maginal tax rates and effective tax rates needs to be reduced and the adequate proportion of taxpayers with reasonable tax liability has to be maintained in each income band. Our marginal income tax rates are not low in comparison to other OECD countries, but our effective tax rates are significantly low due to the large number of deductions and credits. There are additional tax credits available to taxpayers with labour-income, which makes their effective tax rates lower than those with other income. Consequently, within the same income band, people with labour income enjoy far lower effective tax rates compared to those with other income.
Hence, for the income tax system to fulfill its own fundamental function, the income redistribution, the following policy reforms are required. Firstly, the excessive use of income deductions has to be replaced with tax credits. Tax credits are not affected by marginal tax rates, thus deliver equal tax benefits for every taxpayer. Therefore, the problems with tax advantages overly taken by high income earners under the income deduction system can be mitigated, and the equity in taxation would be improved. Secondly, the Phase-out Rule, which reduces the amount of deductions as income increases, can be introduced. This rule has been adopted by US, UK and Australia, in a way which reduces or limits the amount of standard deductions for high income earners as their income increase. Thirdly, deductions for retirement savings and retirement annuity have to be restructured. In 2013 tax revisions, deductions for retirement savings and retirement annuity have been converted into forms of tax credits. This may improve the effectiveness of income redistribution, but only to a limited extent, since people with low income (hence, no income tax liability) cannot enjoy the tax benefits. Refundable tax credits can be a positive alternative in order to make the tax advantage available to low income earners and provide incentives for them to join pension schemes.
- 소득양극화 현상 완화를 위한 소득세제 개편방안 연구
- Kim, Jae Jin김재진