South Korea’s tax burden, the ratio of national taxes and local taxes relative to its gross domestic product (GDP), soared to an all-time high in 2018 due to the highest increase in 18 years. The nation’s total tax revenues surged with a rise in corporate taxes and capital gains taxes.
South Korea collected 377.90 trillion won (US$332.51 billion) in local and central government taxes last year, according to the data from related ministries, including the Ministry of Economy and Finance, on April 21. The ratio of tax revenues to GDP, which is tentatively estimated at 1,782 trillion won (US$1.57 trillion), rose by 1.2 percentage points to 21.2 percent last year from 20 percent in 2017. The pace of the increase was the steepest since 2000 when it jumped by 1.6 percentage points to 17.9 percent from the year before.
The tax-to-GDP ratio grew sharply as more corporate taxes were collected on rising corporate income. Many companies provided an “earnings surprise” amid stronger semiconductor sales. The government collected 70.90 trillion won (US$62.38 billion) in corporate income taxes in 2018. The figure was 7.90 trillion won (US$6.95 billion) higher than the government’s expectations. Samsung Electronics alone paid 6.80 trillion won (US$5.98 billion) of national taxes.
The government also collected 7.70 trillion won (US$6.78 billion) more of capital gains taxes as more businesses and individuals sold and bought homes and other real estate properties right before the implementation of the government’s policy designed to raise capital gains tax rates on multiple homeowners to curb rises in housing prices in April last year.
South Korea recorded 25.40 trillion won (US$22.35 billion) of surplus of national tax revenues alone as a whole.
The problem is that tax revenues are not likely to grow much this year and next year. The government produced its tax expenditure budget after it expected to collect 294.80 trillion won (US$259.39 billion) in national taxes this year. However, the government is expected to see its corporate tax revenues, which showed the largest surplus last year, decrease this year due to sluggish sales in the semiconductor market from the second half of last year. The corporate tax rate on profits in 2018 rose from 22 percent to 25 percent based on the standard of assessment with 300 billion won (US$263.97 million) but it will not be enough to cover the fall of tax revenues caused by firms’ overall lower earnings. Not only semiconductor but also major industries, such as automobile, steel and petrochemical, are expected to see a decline in profits this year again so the tax revenues over the next one to two years will be hit hard, including interim prepayment of corporate taxes in August this year and full payment in March. The tax revenues will also decrease by 1.4 trillion won (US$1.23 billion) with a lower securities transaction tax to be applied starting from June this year.
South Korea’s tax burden is increasing every year. However, some point out that the problem is that the government collects more taxes from the middle class instead of the super high income bracket which is the target. Thegrowth insettledtaxes of the top 0.1 percent income earners rose by 59.8 percent from 2012 to 2017, according to the data submitted to Kim Jung-woo of the ruling Democratic Party of Korea (DPK) by the National Tax Service. On the other hand, the figure of top 34 percent income earners, which include the middle class, stood at 76.6 percent, nearly 20 percentage points higher than that of super high income earners.