🚨 Economic Significance of Corporate Tax Decrease and Income Tax Increase
Today Korean Economic News | 2025.02.18
📌 "Workers filling the 'tax revenue gap'"... Income tax grows to match corporate tax
💬 While corporate tax revenue decreased for the second consecutive year to 62.5 trillion won due to last year's economic downturn, income tax increased to 61 trillion won. Income tax's share of national tax revenue reached a record high of 18.1%, becoming similar to the level of corporate tax.
1️⃣ Easy Understanding
Corporate tax revenue is decreasing while income tax revenue is increasing. I will explain what this means and how it affects our economy in simple terms.
There has been a major change in tax revenue, a key resource for government finances. Corporate tax paid by businesses has decreased for the second consecutive year to 62.5 trillion won, while income tax paid by workers has increased to 61 trillion won. As a result, the proportion of income tax in total tax revenue has reached a record high of 18.1%, becoming almost equal to the proportion of corporate tax.
To explain this phenomenon using an everyday example, consider a situation where parents and children share the family's living expenses. Until now, parents (corporations) have shouldered more of the living expenses, but as their income decreases, the burden on children (workers) has relatively increased.
The main cause of this change is the economic downturn. As corporate performance deteriorated, corporate tax revenue decreased, but income tax actually increased due to wage increases and job retention. In particular, the "tax bracket creep" phenomenon, where higher tax rates are applied as nominal wages rise due to inflation, also had an impact.
This means that the balance of tax burden is shifting from corporations to individuals. In the short term, this may help secure government tax revenue, but in the long term, it can negatively affect domestic economic conditions by reducing individuals' consumption capacity. There is also the possibility of a vicious cycle that could negatively affect workers' jobs and income if it leads to reduced investment and employment capacity for companies.
Ultimately, a balanced tax policy is needed to restore corporate vitality and maintain workers' burden at an appropriate level for sustainable economic growth and tax revenue. In particular, various policy alternatives need to be considered, such as introducing an 'inflation-indexed tax base' that adjusts for automatic tax burden increases due to inflation, or tax benefits that promote corporate investment and employment.
2️⃣ Economic Terms
📕 Corporate Tax
Corporate tax is a tax imposed on corporate profits and is a major indicator reflecting economic conditions.
- Calculated based on a company's net profit for the period, with the amount paid increasing as profitability increases.
- Tax rates are differentially applied according to company size and profit scale, and can be adjusted as a policy measure to stimulate the economy.
📕 Income Tax
Income tax is a tax imposed on workers' wages, with progressive tax rates applied in stages.
- It has a progressive structure where higher rates apply as income increases, serving a income redistribution function.
- The actual tax burden is determined through various deduction systems such as earned income deductions, personal deductions, and special deductions.
📕 Tax Revenue
Tax revenue refers to the government's tax income and forms the basis for national fiscal operations.
- It has characteristics that increase or decrease according to economic conditions, tax system changes, and changes in taxable subjects.
- It is divided into national and local taxes, with national taxes further divided into direct taxes (income tax, corporate tax, etc.) and indirect taxes (value-added tax, etc.).
📕 Tax Equity
Tax equity means the balance of tax burden between economic entities and is an important principle of tax policy.
- It is divided into horizontal equity (same tax burden for taxpayers in the same situation) and vertical equity (tax burden according to ability).
- Ensuring tax equity plays an important role in reducing tax resistance and building social consensus.
3️⃣ Principles and Economic Outlook
💡 Economic Significance of Corporate Tax and Income Tax Change Trends
The phenomenon of decreasing corporate tax and increasing income tax is an important indicator reflecting the current economic situation and has several economic implications.
First, it can be interpreted as a signal of deteriorating corporate performance and economic slowdown. The second consecutive year of decrease in corporate tax revenue means that corporate profitability is deteriorating. Particularly given the export-dependent nature of the Korean economy, the poor performance of export companies due to global economic slowdown and intensified trade conflicts has been a major factor. The weakening competitiveness and structural challenges of major industries such as semiconductors, automobiles, and shipbuilding are also behind the decrease in corporate tax. This decrease in corporate tax revenue suggests that economic recovery is being delayed and companies' capacity for investment and employment is decreasing.
Second, it shows a structural change where the center of gravity of tax burden is moving from corporations to individuals. The record high proportion of income tax at 18.1%, becoming similar to the proportion of corporate tax, signifies a change in tax structure. This may not be a short-term phenomenon but a long-term trend due to complex factors such as changes in industrial structure, changes in the labor market, and intensified global competition. In particular, it can also be seen as a transition to an advanced country-type tax revenue structure where the importance of income tax increases while the relative proportion of corporate tax decreases due to aging and low growth.
Third, the combined effect of income growth and price increases contributed to the increase in income tax. The increase in income tax doesn't simply mean that workers' tax burden has increased. It is the result of various factors including nominal wage increases, employment retention, and changes in income distribution. In particular, nominal wage increases due to inflation have caused the 'tax bracket creep' phenomenon, promoting movement to higher tax rate brackets and causing a tax burden increase beyond real income growth. This phenomenon acts as a factor reducing workers' real disposable income during periods of inflation.
Fourth, issues of fiscal stability and tax equity arise due to changes in tax revenue structure. While corporate tax responds sensitively to economic fluctuations, income tax is a relatively stable source of tax revenue. The increase in the proportion of income tax has the effect of increasing the stability of tax revenue in the short term, but in the long term, it poses new challenges in terms of tax burden equity and economic efficiency. In particular, social consensus on the balance of tax burden between corporations and individuals, and between income classes, is becoming increasingly important.
These changes in tax revenue structure have meaning beyond simple fiscal statistics and reflect the structural changes and challenges of the Korean economy. The balance between corporate tax and income tax is becoming an important task to find a balance between various policy objectives such as economic vitality and distributive justice, fiscal stability and international competitiveness.
💡 Impact of Tax Revenue Changes on Economic Entities
The phenomenon of decreasing corporate tax and increasing income tax has different impacts on various economic entities including corporations, individuals, and the government.
First, from a corporate perspective, there is coexistence of short-term tax burden relief and concerns about long-term competitiveness weakening. While the decrease in corporate tax may seem like a reduction in corporate tax burden, it is difficult to see it as a real benefit as it is the result of profitability deterioration. Rather, it can negatively impact long-term competitiveness through reduced investment capacity, R&D reduction, and employment contraction due to profitability deterioration. Especially in a situation where global competition is intensifying, reduced investment capacity can be a threat factor for securing future growth engines.
Second, from a worker's perspective, there are concerns about decreased disposable income and weakened consumption capacity due to increased tax burden. The increase in income tax directly reduces workers' after-tax income. Especially coupled with increased living expenses due to inflation, it can lead to reduced real purchasing power. This can trigger a vicious cycle of domestic consumption contraction and economic slowdown, and there are concerns that it will aggravate the economic burden on the middle class and working class.
Third, from a government perspective, tax revenue imbalance and difficulties in fiscal operation can be exacerbated. The decrease in corporate tax and increase in income tax mean a change in the overall tax revenue structure, which affects fiscal planning and policy operation. In particular, concerns about expanded fiscal deficit due to tax revenue shortage are growing, which can be a burden on national credit ratings and fiscal soundness. Also, the need to redesign tax policy according to changes in tax revenue structure is increasing.
Fourth, at the societal level, the issue of balance between tax burden equity and economic vitality arises. As the center of gravity of tax burden moves from corporations to individuals, social discussions on tax justice and equity are becoming important. In particular, the issue of how to balance corporate social responsibility and tax equity, economic growth and distributive justice, is emerging as a key issue. This is an area that requires consensus on socio-economic values and future vision beyond a simple issue of tax technique.
Considering these complex impacts, a comprehensive approach is needed that seeks to restore the virtuous cycle structure of the entire economy and balanced burden and benefits between various economic entities, rather than simply focusing on the increase or decrease of specific tax items. In particular, it is an important time to find the optimal balance point between various policy objectives such as short-term tax revenue securing, long-term economic vitality, and social equity.
💡 Policy Response Directions and Implications
To respond to the phenomenon of decreasing corporate tax and increasing income tax, various policy approaches and institutional improvements are needed.
First, policy support for economic recovery and enhancing corporate vitality should be prioritized. The decrease in corporate tax reflects the deterioration of corporate profitability, and economic recovery and strengthening corporate competitiveness are the fundamental solutions. Corporate investment and employment expansion should be induced through expanded tax support for innovative companies, strengthened R&D investment incentives, and regulatory rationalization. Strategic support for advanced industry fields that can be future growth engines is particularly important.
Second, institutional improvements are needed to alleviate the actual burden of income tax. To alleviate the 'tax bracket creep' phenomenon where nominal income increases due to inflation lead to actual tax burden increases, it is necessary to introduce tax bracket adjustments reflecting the inflation rate (inflation-indexed tax base). Also, measures to preserve real disposable income through expanded tax credits and income deductions for the middle class and working class, and strengthened Earned Income Tax Credit (EITC) should be considered.
Third, tax system reform is required to increase tax equity and tax efficiency. In addition to the balance between corporate tax and income tax, it is necessary to redesign the tax system in a direction that increases tax equity for various income sources and assets such as asset income, financial income, and real estate. In particular, the income redistribution function of taxation should be strengthened through enhanced taxation on high-income earners' asset income, prevention of corporate tax avoidance, and rational reorganization of tax exemption and reduction systems.
Fourth, a structural approach is needed for tax revenue base diversification and stabilization. Efforts are needed to lower excessive dependence on corporate tax and income tax, and to discover and strengthen various tax sources such as indirect taxes, environmental taxes, and digital taxes. Also, the stability and sustainability of public finance should be secured by building a tax system that can increase the accuracy of tax revenue prediction and respond flexibly to economic fluctuations.
Fifth, the linkage between tax policy and fiscal expenditure policy should be strengthened. Changes in tax revenue structure inevitably affect fiscal expenditure policy. To use limited resources efficiently, resetting expenditure priorities, restraining unnecessary and urgent expenditures, and strengthening the efficiency of welfare policies should be paralleled. Especially in a situation where tax revenue uncertainty is increasing, strengthening fiscal rules and expenditure efficiency are even more important tasks.
These policy responses should aim beyond short-term tax revenue securing to restore the virtuous cycle structure of the economy and build a sustainable growth foundation. In particular, wisdom to find a balance between various policy objectives such as economic vitality and distributive justice, fiscal soundness and strengthening social safety nets is more important than ever.
4️⃣ In Conclusion
The phenomenon of decreasing corporate tax and increasing income tax reflects the structural changes and challenges of the Korean economy beyond a simple change in tax revenue structure. This is the result of complex factors such as economic recession, weakening corporate competitiveness, changes in the labor market, and intensified global competition, requiring both short-term responses and a structural approach from a mid to long-term perspective.
To improve the current situation, it is most important to restore the virtuous cycle structure of the economy. By strengthening corporate vitality and innovation capacity to increase profitability, investment and employment can naturally expand, which can also expand the tax revenue base. In particular, efforts to enhance corporate competitiveness through strategic support and regulatory rationalization for advanced industry fields that can be future growth engines should be paralleled.
At the same time, institutional improvements to alleviate the actual tax burden on workers are also needed. Measures should be sought to preserve disposable income and activate domestic consumption through tax bracket adjustments reflecting the inflation rate, expanded tax credits and income deductions for the middle class and working class, and strengthened Earned Income Tax Credit. This will be an important element that enables the virtuous cycle of economic recovery and tax revenue expansion.
Tax system reform to increase tax equity and tax efficiency is also an important task. In addition to the balance between corporate tax and income tax, it is necessary to redesign the tax system in a direction that increases tax equity for various income sources and assets such as asset income, financial income, and real estate. In particular, the income redistribution function of taxation should be strengthened through enhanced taxation on high-income earners' asset income, prevention of corporate tax avoidance, and rational reorganization of tax exemption and reduction systems.
Ultimately, the phenomenon of decreasing corporate tax and increasing income tax should be understood as a signal that compressively shows the challenges and tasks facing the Korean economy. To effectively respond to these changes, a comprehensive and balanced approach is needed that aims beyond short-term tax revenue securing to strengthen the economic constitution and build a sustainable growth foundation. Wisdom and cooperation to find the optimal balance point between various elements such as corporate vitality, worker burden, government finance, and social equity are more important than ever.