🚨 Income Tax Burden and Middle-Class Struggles: The 16-Year-Old Tax Threshold
Today Korean Economic News | 2025.05.06
📌 Annual Salary of 88 Million Won: 16 Years as a Tax Threshold...Middle-Class Burden Increases
💬 Over the past 10 years, income tax has increased by 35 trillion won, with 84% of this burden falling on workers earning over 80 million won annually. The structure where tax rates sharply increase for salaries exceeding 88 million won has remained unchanged for 16 years, intensifying the middle class's tax burden. As a result, income tax reform discussions are actively ongoing. Tax experts point out that tax bracket adjustments are necessary, considering inflation and wage increases.
1️⃣ Easy Understanding
In Korea's income tax structure, an annual salary of 88 million won has special significance. When income exceeds this amount, the tax burden increases significantly. This threshold hasn't changed for 16 years, effectively increasing the tax burden on the middle class.
Korea uses a "progressive tax" system that applies different tax rates for different income levels. Higher incomes face higher tax rates. The problem is that these income thresholds haven't been adjusted for a long time. Since 2009, when annual salary exceeds 88 million won (taxable income of 46 million won), the tax rate jumps dramatically from 15% to 24%. This structure remains unchanged today.
Over the past 16 years, prices and wages have steadily increased, but tax brackets have stayed the same. This means more people are now subject to higher tax rates. Simply put, an annual salary of 88 million won was once considered "high income," but now it's closer to the average income level for middle-class families in major cities, yet it's still taxed at a high rate.
Recent statistics show that income tax revenue increased by 35 trillion won over the past decade, with 84% of this coming from workers earning over 80 million won annually. Considering that a family of four needs at least 80 million won annually to maintain a middle-class lifestyle in Seoul, many argue that the current tax structure places an excessive burden on the middle class.
The government and National Assembly are discussing implementing an "inflation-indexed tax system" that would adjust income tax brackets in line with inflation rates, or raising the tax brackets themselves. However, concerns about reduced tax revenue and controversy over tax cuts for high-income earners make reform difficult.
In the end, people with middle-class income levels are paying taxes like high-income earners, creating a "tax mismatch" that is intensifying the tax burden and dissatisfaction among the middle class.
2️⃣ Economic Terms
📕 Progressive Tax
A progressive tax is a taxation method where tax rates increase as income rises.
- Higher incomes pay a higher percentage of taxes, which has an income redistribution effect.
- Korea's income tax currently applies an 8-level progressive tax rate from 6% to 45%.
📕 Taxable Income
Taxable income is the amount of income that serves as the basis for tax calculation.
- It's the amount after deducting necessary expenses, income deductions, and tax credits from total income.
- Tax amounts are calculated by multiplying taxable income by the tax rate, forming the basis of actual tax payments.
📕 Income Deduction
Income deductions are items subtracted from total income when calculating taxable income.
- These include earned income deductions, personal deductions, and special income deductions, which reduce taxable income.
- Larger deduction amounts result in lower taxes.
📕 Inflation-Indexed Tax System
An inflation-indexed tax system automatically adjusts tax brackets and deduction amounts according to inflation rates.
- It prevents "tax burden increases" caused by nominal income growth due to inflation.
- Already implemented in several developed countries like the US and Canada, it maintains taxpayers' real tax burden at a consistent level.
3️⃣ Principles and Economic Outlook
💡 Income Tax Structure and Trends
Let's examine the characteristics and trends of Korea's income tax structure.
First, the current income tax structure has sections with steep tax rate increases. Korea's income tax applies an 8-level progressive tax rate based on taxable income: 6% for up to 12 million won, 15% for 12-46 million won, 24% for 46-88 million won, 35% for 88-150 million won, 38% for 150-300 million won, 40% for 300-500 million won, 42% for 500 million-1 billion won, and 45% for over 1 billion won. Notably, there's a section where the rate jumps sharply by 9 percentage points from 15% to 24% at taxable income of 46 million won (annual salary of about 88 million won), significantly increasing the tax burden once this threshold is crossed.
Second, the current tax brackets have remained almost unchanged for 16 years since 2009. Since 2009, prices have risen by about 30%, and average wages have increased significantly, but income tax brackets haven't been adjusted. This has pushed more workers into higher tax rate brackets. In 2015, only 4.3% of wage earners had taxable income exceeding 46 million won, but by 2024, this proportion had increased to 15.8%. This means that due to nominal income growth, more middle-class workers are now subject to higher tax rates.
Third, the imbalance in tax burden is worsening. According to Statistics Korea, the proportion of income tax paid by the top 20% increased from 64% in 2015 to 76% in 2024. The tax burden has especially increased for workers earning over 80 million won annually. The problem is that many of these people are not truly "rich" but closer to middle class in major cities. Considering that a family of four needs at least 80 million won annually to maintain a middle-class lifestyle in Seoul, the current tax structure can be seen as placing an excessive burden on the middle class.
As the income tax structure has remained unadjusted for a long time, the middle class's tax burden is gradually increasing. This is called "tax inflation," where people face higher tax rates due to nominal income increases even though their real income hasn't increased much.
💡 Impact and Problems of Increased Middle-Class Tax Burden
Let's analyze how increased income tax affects middle-class households and the broader economy.
First, reduced disposable income for the middle class raises concerns about decreased consumption. Higher tax burdens mean less income available to spend. Middle-class households with large mortgage interest and education expenses may have even more limited spending power due to tax increases. In fact, the consumption propensity of the middle class has been continuously declining over the past five years, contributing to domestic economic stagnation. Additionally, with increased price burdens due to inflation following COVID-19, an increased tax burden could further worsen the economic difficulties of the middle class.
Second, there are concerns about reduced work motivation and increased tax avoidance. Excessive tax burdens can lower workers' motivation to work. Particularly, workers with annual salaries between 80-90 million won may have reduced incentive for self-development or additional work, as there's little practical benefit from additional income increases. This could lead to reduced economic vitality in the long term. Also, taxpayers who feel their tax burden is excessive are increasingly seeking various legal methods to reduce taxes, which could negatively impact government tax revenue.
Third, there could be an increase in skilled professionals leaving the country. As globalization progresses, movement of skilled workers between countries is becoming more active. Especially in fields like IT, finance, and medicine, there are increasing cases of professionals who feel their domestic tax burden is high moving to places with lower tax burdens like Singapore and Hong Kong. In fact, high-income professionals leaving Korea increased by 15% compared to the previous year. This brain drain is concerning as it could lead to weakened national competitiveness.
Excessive tax burdens on the middle class not only cause short-term economic difficulties for households but can also lead to larger socioeconomic problems in the long term, such as reduced economic vitality and brain drain. Therefore, establishing an appropriate level of tax burden and a fair tax structure is important.
💡 Income Tax Reform Directions and Response Strategies
Let's examine income tax system improvement directions and legal response strategies for taxpayers.
First, an inflation-indexed tax system is being discussed as a major reform direction. This system automatically adjusts tax brackets and deduction amounts according to inflation rates. Already implemented in several developed countries like the US, Canada, and the UK, this system prevents "tax burden increases" caused by nominal income growth due to inflation. A bill to amend the Income Tax Act has been proposed in the National Assembly to adjust taxable income brackets every three years in line with inflation rates. Another option being considered is simplifying the current 8-level tax rate structure to 5 levels and lowering rates for middle brackets.
Second, the government's tax reform is expected to proceed cautiously. While acknowledging the need for income tax reform, the government is taking a cautious approach due to concerns about reduced tax revenue and controversy over tax cuts for high-income earners. Currently, income tax bracket adjustments are reportedly being considered for the 2026 tax reform. However, significant tax rate reductions or bracket adjustments are expected to be difficult given the urgent need for fiscal soundness. Instead, there's a high possibility of easing tax burdens by expanding tax credits and exemption benefits for specific classes and industries.
Third, taxpayers need to manage their taxes by utilizing various deductions and exemptions. Individual taxpayers should maximize deduction and exemption benefits available under current tax law. It helps to join tax credit products like pension savings and Individual Retirement Pensions (IRPs), and maximize deductions for credit/debit card use, medical expenses, and education expenses. Also, investing in separately taxed financial products not subject to spousal combined taxation, or considering income distribution strategies among family members can be considered. However, these strategies must be within legal boundaries, and seeking expert advice when necessary is recommended.
Income tax system reform must proceed cautiously, considering complex interests and fiscal conditions. However, easing the middle class's tax burden is an important task for stimulating domestic consumption and enhancing economic vitality. While waiting for government policy changes, individual taxpayers should also pay more attention to legal tax management.
4️⃣ In Conclusion
As the income tax structure has remained virtually unchanged for 16 years, more middle-class people are becoming subject to high tax rates due to price and wage increases. Particularly, the current structure where tax rates sharply increase from 15% to 24% at an annual salary of 88 million won places an excessive burden on the actual middle class.
This "tax mismatch" phenomenon can lead to reduced consumption due to decreased disposable income for the middle class, and can expand into larger socioeconomic problems such as reduced work motivation and brain drain. Middle-class families in major cities like Seoul, already burdened with high housing and education costs, are experiencing double hardship due to high taxes.
Various options for income tax structure reform, such as introducing an inflation-indexed system or adjusting tax rate brackets, are being discussed, but major changes in the short term seem difficult due to concerns about reduced tax revenue and fiscal soundness issues. The government is reportedly considering income tax bracket adjustments through the 2026 tax reform.
In this situation, it's important for individual taxpayers to maximize various deductions and exemption benefits allowed under current tax law, such as pension savings, credit card deductions, and medical/education expense deductions. Active response is needed, such as establishing tax plans and continuously updating related information.
Ultimately, the income tax structure should be fairly designed to reflect economic reality and taxpayers' ability to pay. Easing the middle class's tax burden is an important task for stimulating domestic consumption and creating a virtuous economic cycle, and both the government and taxpayers should pay more attention to this issue.