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Resist the temptation of tax hikes and fix the structure first

Published: 04 Aug. 2025, 00:03

Kim Woo-cheol

The author is a professor of the Department of Taxation at the University of Seoul and a member of the Reset Korea economic subcommittee.

Korea’s fiscal balance has deteriorated sharply, with cumulative deficits reaching 620 trillion won ($446.8 billion) over the past six years. As the economy slows, the government has been forced into a more expansionary fiscal stance. In such conditions, the quickest way to cover large deficits is through higher taxes. With the tax burden ratio having fallen to its lowest level in a decade, the new administration’s first tax revision has embraced a revenue-raising approach to manage the shortfall.

First Vice Finance Minister Lee Hyoung-il, center, speaks with a staff member during a Democratic Party-government consultation meeting on tax reform held at the National Assembly members' office building in Yeouido, western Seoul, on July 29. [NEWS1]

While the shift toward bolstering revenue may appear inevitable, the specific measures in the draft tax reform are disappointing. They give the impression of a rushed policy rollout, coming less than three months into the new administration. After the government’s failed attempt to implement a financial investment income tax, an alternative form of capital taxation was expected. Instead, the plan reverts to raising securities transaction taxes and tightening the criteria for large shareholders, essentially returning to an old and unpopular framework.

Such a reversal invites criticism for distorting markets rather than enhancing equity. Targeted taxation, which appears to single out certain investors, erodes confidence without creating sustainable revenue. A more responsible path would be to expand comprehensive income-based taxation on capital gains, even if that process is more gradual and politically difficult.

The lure of easy revenue has also surfaced in the corporate tax plan. Corporate tax receipts, which peaked at 103 trillion won two years ago, have since dropped to 62 trillion won, largely due to volatile corporate earnings. The decline was not primarily driven by the modest tax cut implemented three years ago, which only reduced revenue by about 3 trillion won last year. Yet the government now frames a tax rate increase as if it could reverse the revenue trend entirely.

Adjusting corporate tax rates by one percentage point usually has a limited effect in normal times. But raising the rate just two months into a new administration, reversing a cut made three years earlier, sends a damaging signal. Both domestic and foreign investors will interpret the move as political risk. Large-scale investments that require 10 to 20 years to mature are unlikely to take root in an environment where tax policy swings with every change of government. Even a government that claims to prioritize growth will find itself burdened with an antibusiness reputation if corporate taxation becomes a political tool.

The government is also promoting the separation of dividend income taxation as a shareholder-friendly measure. In practice, its effect on payouts is likely to be limited. Only the incremental portion of increased dividends would qualify for lower rates, leaving little incentive for companies to expand distributions. Cash-rich firms already maintain payout ratios near 30 percent, leaving little room for further expansion. Firms with weaker earnings, which make up the majority, are unlikely to raise dividends just to access modest tax benefits. If the corporate tax hike and dividend tax separation are implemented together, the market is more likely to fall than to rise toward the government’s hoped-for “Kospi 5000" milestone.

Recent international trends in taxation emphasize structural reform as the most credible approach to revenue expansion. Incremental and broad-based adjustments across income levels and corporate sectors are seen as the sustainable path. One-off, short-term hikes aimed purely at revenue gains are consistently warned against by the International Monetary Fund and the Organisation for Economic Cooperation and Development. Such measures trigger political conflict and social resistance, and they fail to endure.

The Financial district of Yeouido, western Seoul [YONHAP]

Britain has pursued gradual tax reform that quietly spreads the burden among the middle class, the wealthy and corporations, earning generally positive assessments. France, by contrast, attempted a large-scale wealth and corporate tax hike last year under a “tax the rich” banner. Critics now see it as populist, unlikely to deliver sustained revenue. Romania offers an even starker warning: Under pressure from the European Union to address its fiscal deficit quickly, the government abruptly raised the value-added tax while leaving low personal income taxes untouched. The move triggered public backlash, protests by civil servants and a constitutional court review, highlighting the perils of one-time revenue grabs without broad social consensus.

Korea’s new administration would do well to heed these lessons. Tax policy must aim for structural improvement, not short-term fixes. Prioritizing corporate tax base expansion over rate hikes, broadening income-based taxation on financial assets and building predictability into the system are the paths toward sustainable fiscal health. Succumbing to the temptation of quick tax hikes will only erode market trust, distort investment behavior, and undermine the government’s own credibility in the long run.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.