🚨 Family Unit Tax System Review: Tax Burden Reduced for Multi-Child Families

Today Korean Economic News | 2025.06.23

📌 Individual→Family Unit Taxation Change Under Review, Careful Approach Due to Tax Revenue Concerns

💬 The government announced it is reviewing a plan to change the current individual-based income tax system to a family-based system. This policy aims to encourage childbirth by reducing tax burden on married couples and multi-child families as part of measures to address low birth rates. The government estimates that couple-based taxation would reduce annual tax revenue by about 24 trillion won, while French-style family-based taxation could reduce it by about 32 trillion won, so they are carefully reviewing this along with revenue compensation measures. Meanwhile, regarding additional new town supply in the capital area, the government stated it would avoid short-term measures and focus on fundamental solutions to housing market problems.

1️⃣ Easy Understanding

Until now, Korea has collected taxes based on individual income, but in the future, taxes might be calculated based on family units. This would reduce the tax burden for married couples and families with many children.

Currently, Korea uses "individual-based taxation." This means if a husband earns 50 million won per year and his wife earns 30 million won per year, they calculate taxes separately for each person. But if it changes to family-based taxation, they would combine the couple's income to calculate an average, or give tax breaks based on the number of children.

Let me explain with an example. Under the current system, a single-income family earning 80 million won and a dual-income family where both spouses earn 40 million won each pay different amounts of tax. But under family-based taxation, families with the same total income would pay similar taxes. Also, families with more children could receive bigger tax benefits.

The background for this change is the serious low birth rate problem. Korea's birth rate has dropped to 0.72 children per woman, the world's lowest level. The government is considering various policies to encourage marriage and childbirth, and tax system reform is one of them.

However, such changes come with big costs. Just introducing couple-based taxation would reduce annual tax revenue by 24 trillion won, and introducing French-style family-based taxation that considers the number of children would reduce it by 32 trillion won. This is a large amount that represents a significant portion of the government budget.

The government shows a different approach to real estate policy. While concerns about rising housing prices are growing, the government said it would seek fundamental solutions rather than short-term measures like supplying additional new towns. This means they want to find long-term, sustainable solutions instead of quickly building new towns to temporarily control housing prices like in the past.

These policy changes could directly affect our lives, so they are important issues we should watch carefully.

2️⃣ Economic Terms

📕 Individual-Based Taxation

Individual-based taxation is a system that taxes each person's income independently.

• This is the current system Korea uses, where even married couples calculate taxes separately based on their individual incomes.
• It has a progressive tax structure where higher income earners pay higher tax rates.
• Dual-income couples can reduce their tax burden by spreading income between both spouses.

📕 Family-Based Taxation

Family-based taxation is a system that calculates taxes by combining family members' incomes.

• Methods include averaging couples' combined income or adjusting taxes based on the number of children.
• France's family quotient system is a representative example that significantly reduces tax burden based on the number of children.
• This system favors single-income families or multi-child families but may be disadvantageous for dual-income families.

📕 Tax Revenue

Tax revenue is the income the government collects through taxes.

• It consists of various taxes including income tax, corporate tax, and value-added tax, and is the government's main source of financial income.
• Korea's total tax revenue in 2024 was about 350 trillion won, with income tax accounting for about 90 trillion won.
• Decreased tax revenue directly affects government budget planning and policy implementation.

📕 Progressive Tax

Progressive tax is a tax system that applies higher tax rates to higher incomes.

• Korea's income tax applies progressive rates from 6% to 45% to promote income redistribution.
• It reduces tax burden on low-income groups and increases it on high-income groups to pursue social equity.
• Family-based taxation has the effect of adjusting tax burden within this progressive tax structure.

3️⃣ Principles and Economic Outlook

✅ Need for Family-Based Taxation and Its Effects

• Let's examine the background and expected effects of tax system reform to solve the low birth rate problem.

  • First, Korea's serious low birth rate problem is the starting point for tax system reform discussions. Korea's total fertility rate recorded 0.72 children per woman in 2023, the lowest level among OECD countries. This is far below the 2.1 children needed to maintain the current population level. One of the main causes of low birth rate is the economic burden of raising children. According to Statistics Korea surveys, the cost of raising one child exceeds 1 million won per month on average, which is a significant burden on households. Under the current individual-based taxation system, tax benefits for families with many children are limited, so critics have continuously pointed out that the effect of encouraging childbirth is insufficient.

  • Second, family-based taxation could bring substantial tax burden reduction effects for multi-child families. Using France's family quotient system as an example, they count couples as 2 units, the first two children as 0.5 units each, and from the third child onward as 1 unit each to divide family income before calculating taxes. For example, if a family with a couple and 3 children (total 4.5 units) has an annual income of 100 million won, they would apply tax rates based on about 22.22 million won (100 million divided by 4.5), then multiply by 4.5 to calculate the final tax amount. This way, families with more children apply lower tax rate brackets and their tax burden decreases significantly. According to Korea Development Institute (KDI) analysis, introducing this system could save families with 3 children about 3-5 million won annually compared to current taxes.

  • Third, we can confirm the policy effects of family-based taxation through overseas cases. France has operated a family quotient system since 1945, and currently has a birth rate of about 1.8 children, which is relatively high within Europe. Germany also strengthened couple-based taxation from 2013 and saw effects of rising birth rates. However, there is debate about how directly these systems contributed to increased birth rates. In France's case, it was implemented together with comprehensive family policies including family allowances, free childcare, and parental leave, so it's difficult to separate the effects of tax reform alone. But the general assessment is that it helps raise the desire for childbirth by reducing the economic burden on child-rearing families.

• Family-based taxation can be an important policy tool for solving the low birth rate problem, but it has limitations alone and should be pursued together with comprehensive family policies.

✅ Tax Revenue Decrease Problems and Fiscal Soundness Concerns

• Let's analyze the scale of tax revenue decrease from introducing family-based taxation and its impact on government finances.

  • First, couple-based taxation alone is expected to reduce annual tax revenue by 24 trillion won. According to estimates by the Ministry of Economy and Finance and Korea Institute of Public Finance, introducing the "2-split method" that divides couples' combined income by 2 and applies it to each spouse would reduce annual tax revenue by about 24 trillion won. This is a massive amount equivalent to 27% of the 2024 income tax revenue of about 90 trillion won. If French-style family quotient system is fully introduced, the tax revenue decrease could expand to 32 trillion won. This amount equals about 6% of total government expenditures and could significantly affect welfare budgets or social infrastructure investment. Especially as the government is currently trying to control national debt increases, this scale of tax revenue decrease could seriously burden fiscal soundness.

  • Second, alternative revenue sources are needed to compensate for tax revenue decrease. The government is reviewing several measures to compensate for tax revenue decrease from introducing family-based taxation. First is raising tax rates on other categories. Tax revenue could be preserved by raising corporate tax or value-added tax, but this could lead to weakened corporate competitiveness or increased burden on ordinary people. Second is reorganizing tax exemption and reduction systems. This involves securing revenue by organizing part of the current 40 trillion won scale of tax expenditures. Third is introducing new tax categories. There are plans to secure additional income through new taxes like carbon tax, digital tax, and wealth tax. However, all these measures have side effects and limitations, requiring careful review.

  • Third, gradual introduction to reduce fiscal shock is a realistic alternative. France and Germany also didn't introduce family-based taxation all at once from the beginning, but expanded it gradually over decades. Korea would also need a gradual approach rather than sudden full introduction. For example, they could consider first applying it only to families with 3 or more children, or starting with tax credit methods and gradually expanding. Also, setting upper limits on benefits according to income levels is needed to prevent excessive benefits for high-income groups. This way, they could achieve low birth rate countermeasure effects while minimizing fiscal burden. The government should comprehensively review these various options to find the optimal plan suited to Korea's situation.

• Tax revenue decrease is the biggest obstacle to introducing family-based taxation, but it's a problem that can be solved through gradual approaches and alternative revenue sources.

✅ Real Estate Policy Direction and Housing Market Outlook

• Let's analyze changes in new town supply policy and their impact on the housing market.

  • First, the government's cautious stance on new town supply stems from reflection on past policies. For the past 20 years, the Korean government has repeatedly used new town development to increase housing supply whenever housing prices rose. The results were 1st generation new towns (Bundang, Ilsan, Pyeongchon, Sanbon, Jungdong), 2nd generation new towns (Pangyo, Gimpo, Paju, etc.), and 3rd generation new towns (Hanam, Gwacheon, Namyangju, etc.). However, this approach only had temporary effects and didn't become a fundamental solution. Rather, just announcing new towns caused side effects of rising housing prices in nearby areas, and large-scale development caused environmental destruction and infrastructure shortage problems in existing areas. Especially during the long development period of 7-10 years until new town move-ins were completed, housing shortage problems were not resolved.

  • Second, fundamental solutions require diversification of housing supply structure and demand management policies. Instead of new towns, the government is reviewing ways to increase housing supply through activating reconstruction and redevelopment of existing urban centers, developing semi-industrial areas, and high-density development around transit stations. This is more efficient than developing new land because it can utilize existing infrastructure. The government is also pursuing policies to reduce housing cost burden by expanding public rental housing supply and suppressing speculative demand by strengthening taxes on multiple homeowners. Recently introduced measures like nationwide property tax exemption for single homeowners and expanded support for first-time homebuyers are part of policies favoring actual demand. The government's basic direction is to solve structural problems in the housing market through this comprehensive approach.

  • Third, housing price upward pressure is likely to continue in the short term. With limited additional new town supply and difficulty in immediate volume increases through existing supply methods, housing supply shortage in the capital area market seems likely to continue for the time being. Especially in Seoul and the capital area, there are structural limits to supply expansion due to limited developable land. Additionally, if low interest rate trends continue and household income increases through family-based taxation, housing purchasing power could increase, leading to demand growth. However, the government's strong demand suppression policies and economic slowdown concerns will act as factors limiting upward pressure. Experts forecast that capital area apartment prices will show gradual upward trends in the second half of 2025.

• A paradigm shift in real estate policy is necessary, but managing price upward pressure due to supply shortage in the short term will be a core policy challenge.

4️⃣ In Conclusion

The government's review of family-based tax system reform is an important policy signal showing active response to the low birth rate problem Korea faces. Changing from current individual-based taxation to family-based taxation means transformation of social values and policy direction beyond simple tax changes.

If family-based taxation is introduced, tax burden on married couples and multi-child families would substantially decrease, which could raise the desire for childbirth. Especially for families with 3 or more children, they could save several million won in taxes annually, significantly reducing the economic burden of raising children.

However, such changes come with considerable costs. Annual tax revenue decrease of 24-32 trillion won would be a big burden on government finances, requiring alternative revenue sources for compensation. Therefore, the government should find ways to achieve policy goals while minimizing fiscal shock through gradual approaches rather than hasty full introduction.

In real estate policy, they are seeking more sustainable and fundamental solutions, moving away from existing new town development-centered supply policies. While this is a desirable direction in the long term, short-term housing price upward pressure due to supply shortage is likely to continue.

All these policy changes are part of efforts to increase Korea's social sustainability. Solving low birth rate problems and stabilizing the housing market are both tasks that must be resolved for our society's future.

Ultimately, for these policies to succeed, understanding and cooperation from all members of society is needed. An attitude of working together for long-term social development, even if it means accepting short-term costs and inconveniences, will be important.