🚨 Tax Expenditures Break 80 Trillion Won
Today Korean Economic News for Beginners | 2025.09.28
0️⃣ Tax Benefits Expansion Raises Fiscal Pressure and Inequality Concerns
📌 Next Year's Tax Reductions Hit Record 80.5 Trillion Won, Critics Point to Benefits Concentrated on High Earners and Large Corporations
💬 According to the 2025 Tax Expenditure Budget submitted by the government, next year's national tax reductions will break through 80 trillion won for the first time in history. Tax expenditures total 80.5277 trillion won, with the reduction rate reaching 16.1% of national tax revenue, exceeding the legal limit of 15%. Korea's tax burden ratio is 17.8% in 2024, which is 7.6 percentage points lower than the OECD average of 25.4%. The problem is that tax benefits are concentrated on high earners and large corporations, weakening the income redistribution function. Income tax-related tax expenditures account for more than half of the total, while corporate R&D tax credits and investment tax credits continue to expand, raising concerns about fiscal sustainability and tax fairness.
1️⃣ Easy Understanding
The government's "tax expenditures" - giving tax breaks for specific purposes - will exceed 80 trillion won next year. This means the country is giving up 16% of the taxes it should collect, but these benefits mainly go to high earners and large corporations, raising fairness concerns.
Tax expenditures are a system where the government tries to achieve specific policy goals by cutting taxes instead of directly spending money. For example, giving tax credits for pension savings or reducing taxes when companies invest in research and development are all forms of tax expenditures.
Looking at next year's 80 trillion won in tax expenditures, more than half are income tax-related items. This includes work income deductions, personal deductions, pension savings tax credits, and housing subscription savings income deductions. The problem is that these benefits favor those with higher incomes.
For example, pension savings tax credits reduce 13.2-16.5% of contributions up to 4 million won annually from your taxes. High earners can afford to contribute larger amounts, so they receive bigger benefits in practice. Similarly, mortgage interest income deductions only benefit people who can afford to buy homes.
In the corporate sector, R&D tax credits and investment tax credits are expanding, but these benefits mainly go to large corporations and mid-sized companies. Small businesses and small shop owners have relatively fewer opportunities to receive these benefits.
Korea's tax burden ratio is 17.8%, much lower than the OECD average of 25.4%. This means we collect less tax compared to other developed countries, which also means it's harder to secure funding for welfare and public services.
In the end, by supporting certain groups or companies through collecting less tax, we create a paradoxical situation where low-income earners and small businesses that need support don't receive benefits.
2️⃣ Economic Terms
📕 Tax Expenditures
Tax expenditures are systems where the government reduces or exempts some legally mandated taxes, achieving policy goals without direct budget spending.
- They take forms like tax credits, income deductions, tax exemptions, and reduced tax rates.
- They have the same effect as government spending but only appear as "reduced revenue" in budget documents.
- It's important to clearly identify and manage the beneficiaries and scale of these benefits.
📕 Tax Burden Ratio
The tax burden ratio is the percentage of total tax revenue (national and local taxes) divided by Gross Domestic Product (GDP), showing the level of taxes citizens bear.
- Korea's tax burden ratio in 2024 is 17.8%, lower than the OECD average of 25.4%.
- A lower burden ratio reduces concerns about economic activity decline but creates insufficient funding for public services.
- The appropriate level varies by each country's economic development stage and welfare level.
📕 Tax Credits
Tax credits directly subtract a certain amount from the taxes you owe, providing greater tax savings than income deductions.
- They subtract a certain percentage of contributions to pensions, savings, donations, etc. from your tax bill.
- Income deductions reduce your taxable income, but tax credits directly reduce the actual taxes you pay.
- High earners can utilize larger credit limits, potentially concentrating benefits.
📕 Fiscal Sustainability
Fiscal sustainability refers to the government's ability to maintain debt repayment and provide public services over the long term.
- When tax expenditures expand and tax revenue decreases, fiscal capacity weakens and sustainability can be threatened.
- This concept becomes more important as fiscal spending demands increase due to aging populations and welfare expansion.
- Appropriate tax revenue collection and efficient spending management are key challenges.
3️⃣ Principles and Economic Outlook
✅ Background of Tax Expenditure Expansion and Structural Problems
Let's analyze the background behind tax expenditures breaking through 80 trillion won and the resulting structural problems.
First, tax benefits for economic stimulus and specific industry development have continuously expanded. The government has increased income deductions and tax credits to boost consumption during economic downturns, and expanded R&D tax credits to respond to the Fourth Industrial Revolution. Housing-related tax benefits have also been continuously provided for real estate market stability. These accumulated policies have led to growing tax expenditure scales. Particularly after COVID-19, various tax support measures introduced for economic recovery have been extended rather than expired, becoming structurally entrenched.
Second, the structure of tax expenditure benefits is concentrated on high-income groups and large corporations. Income tax-related tax expenditures account for more than half of the total, meaning high earners who pay more income tax receive more benefits. For example, with pension savings tax credits, high earners can afford to contribute larger amounts and receive bigger practical benefits. In the corporate sector, R&D tax credits and investment tax credits are mainly utilized by large corporations and mid-sized companies, while small businesses and small merchants are relatively excluded. This weakens the income redistribution function of the tax system.
Third, post-implementation management and evaluation systems for tax expenditures are inadequate. Once introduced, tax expenditures tend to become entrenched rights that are difficult to abolish. In practice, they are often extended habitually without systematic evaluation of policy goal achievement or efficiency. Although the need for tax expenditure management is pointed out every year during parliamentary audits, substantial improvements haven't been made. This results in continuously growing tax expenditure scales while policy effects remain unclear.
The indiscriminate expansion of tax expenditures weakens the tax base and exacerbates income inequality.
✅ Fiscal Health and Tax Fairness Issues
Let's examine how increasing tax expenditures affect national finances and social fairness.
First, there are concerns about reduced fiscal capacity due to decreased tax revenue. The 80 trillion won in tax expenditures represents 16% of the 2025 national tax revenue budget (501 trillion won). This means the government is giving up one-sixth of the taxes it should collect, reducing funding for public investment and welfare spending accordingly. Particularly with welfare spending increases due to aging populations and Green New Deal investments needed for carbon neutrality, weakened tax bases could become serious problems. If tax revenue decreases further during economic downturns, there's also risk of rapidly increasing fiscal deficits.
Second, international imbalances are deepening due to tax burden ratio gaps. Korea's tax burden ratio of 17.8% is 7.6 percentage points lower than the OECD average of 25.4%. This is significantly lower compared to major developed countries like France (45.4%), Germany (39.8%), and Japan (28.4%). While lower tax burden ratios can help economic vitality in the short term, they constrain infrastructure investment and social security system expansion in the long term. Particularly with rapid low birth rates and aging populations, such gaps can become obstacles to sustainable development.
Third, regressive tax structures exacerbate inequality. Current tax expenditure structures have "regressive" characteristics where higher incomes and more assets receive greater benefits. For example, mortgage interest income deductions only benefit middle-class and above who can buy homes, and pension savings tax credits can only be utilized by people with spare funds. Meanwhile, low-income earners often pay little or no income tax, making them unable to receive these benefits. This creates results that actually work against the income redistribution function that tax systems should have.
Tax expenditure expansion may have greater negative effects on long-term fiscal health and social fairness than short-term policy benefits.
✅ Future Improvement Plans and Policy Challenges
Let's suggest rational improvement plans for the tax expenditure system and challenges policy authorities must address.
First, systematic evaluation and reorganization of tax expenditures is needed. All currently implemented tax expenditures should be comprehensively evaluated for policy goal achievement, efficiency, and fairness. Items with minimal effects or benefits concentrated on specific groups should be boldly abolished or reduced. Particularly, long-standing items should be redesigned to fit current conditions or have sunset clauses for periodic review. Parliament should also strengthen tax expenditure reviews and require strict feasibility verification for new introductions.
Second, structural reforms to increase tax expenditure fairness are urgent. We should consider expanding benefits currently concentrated on high earners to low-income groups or converting to direct support methods. For example, converting from income deductions to tax credits, and from tax credits to direct support, could provide more practical help to low-income groups. We also need measures to limit excessive benefits for high earners by setting income-bracket differentials or caps on tax expenditure benefits. Corporate tax expenditures should also be reformed to focus more on small businesses and startups rather than large corporations.
Third, tax system reforms and increased tax burden ratios for revenue collection are inevitable. To achieve OECD-average tax burden ratios, we need to consider tax rate increases or expanded tax bases. Particularly, we should increase tax burdens on high earners and large corporations through strengthened capital income taxation, realistic comprehensive real estate taxes, and enhanced corporate minimum taxes. We should also consider introducing new tax categories like carbon taxes and digital taxes. However, since rapid tax increases could burden the economy, gradual and phased approaches are necessary. Combining revenue collection with reduced tax expenditures could simultaneously improve fiscal health and fairness.
Tax expenditure reform requires comprehensive approaches reflecting national development strategies and social values, not simple tax adjustments.
4️⃣ In Conclusion
Next year's tax expenditures breaking through 80 trillion won represents a major turning point in Korea's tax policy. While it superficially appears to expand support for citizens and businesses, it actually carries structural problems that simultaneously threaten fiscal health and social fairness.
The most serious problem is that tax expenditure benefits are concentrated on high earners and large corporations. Tax systems should originally alleviate social inequality through income redistribution functions, but current tax expenditure structures actually play roles that exacerbate inequality. We're seeing paradoxical situations where people who pay more taxes receive more deductions and exemption benefits.
The fact that our tax burden ratio is 7.6 percentage points lower than the OECD average is also a long-term problem. With welfare demands rapidly increasing due to low birth rates and aging populations, and large-scale investments needed for carbon neutrality and digital transformation, our tax base is weakening. While current burdens on citizens and businesses may seem light, this could result in passing greater burdens to future generations.
Inadequate tax expenditure management systems are also serious problems. Once introduced, tax benefits become entrenched rights that are difficult to abolish, and they're often extended habitually without systematic evaluation of policy effects. This way, only tax expenditure scales continue growing while policy goal achievement and efficiency improvements remain difficult to expect.
Improvement measures are clear. First, we need comprehensive reviews of existing tax expenditures to reorganize items with minimal effects or fairness problems. Second, we should mandate strict feasibility verification and sunset clauses when introducing new tax expenditures. Third, we should expand benefits concentrated on high earners to low-income groups or convert to direct support methods.
Ultimately, this breakthrough of 80 trillion won in tax expenditures presents us with an important choice. We must decide whether to continue expanding tax benefits that cater to short-term popularity, or pursue rational tax system reforms considering long-term fiscal health and social fairness. For future generations, choosing the latter would be preferable.
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