🚨 Income Tax Inflation Indexing Under Review
Today Korean Economic News for Beginners | 2025.10.17
0️⃣ Tax Agency "Parent-Funded Gifts Will Be Thoroughly Examined"
📌 Addressing 'Bracket Creep' from Rising Prices, Cracking Down on Unfair Gifts
💬 National Tax Service Commissioner Lim Kwang-hyun announced plans to review an inflation-indexed income tax system as a mid-to-long-term initiative. The goal is to solve the problem where workers' real tax burden increases when prices rise but tax standards stay the same. At the same time, he emphasized thorough verification of "parent advantage" transactions, such as parents gifting high-value apartments in their children's names, to ensure tax fairness. This represents a two-way approach to increase tax system fairness while protecting workers' real income.
1️⃣ Simple Explanation
When prices go up, the value of the same amount of money goes down. But if the tax standards stay the same, people end up paying more taxes even though their real income hasn't increased. The tax agency announced it will review adjusting income tax standards to match inflation to fix this unfairness.
Let me explain what inflation indexing means. The income tax we pay has different tax rates depending on income brackets. For example, lower tax rates apply up to 50 million won in annual salary, and higher rates apply above that. But problems arise when these bracket standards stay the same even as prices rise.
Here's a specific example: Let's say an office worker earned 50 million won last year and got a 5% raise this year (matching inflation) to 52.5 million won. Their real purchasing power is the same as last year, but if the tax bracket standards stay the same, they move into a higher tax bracket and pay more taxes. This is called "bracket creep," which creates an automatic tax increase effect.
Inflation indexing solves this problem by automatically adjusting tax bracket standards each year to match inflation. In the example above, if prices rose 5%, the tax bracket standards would also rise 5%, so the lower tax rate would apply up to 52.5 million won. This way, when real income doesn't change, the tax burden stays the same too.
However, implementing this system requires complex work. It's not just about adjusting tax brackets - basic deductions and various income deduction limits must also be adjusted. Plus, decisions must be made about which inflation indicator to use and how often to make adjustments.
Meanwhile, the tax agency announced it will strongly respond to "parent advantage" gifts. Recently, more parents are buying high-value apartments in their children's names or paying taxes on behalf of their children when they buy homes. In these cases, gift taxes should be paid, but some try to avoid them.
For example, some arrange paperwork to make it look like parents "loaned" money when buying a 3 billion won apartment in a child's name. But in reality, these are often "fake loans" where there's no ability or intention to repay. The tax agency says it will carefully investigate such transactions, and if deemed gifts, will impose taxes plus penalty taxes.
Ultimately, this announcement represents a two-way strategy: reducing workers' real tax burden while strictly responding to wealthy people's tax avoidance schemes.
2️⃣ Economic Terms
📕 Inflation-Indexed Income Tax
An inflation-indexed income tax system automatically adjusts tax standards (tax brackets, deductions, etc.) to match inflation rates.
- It prevents "bracket creep," where real income doesn't increase but tax burden grows because tax standards stay the same while prices rise.
- Most major OECD countries have already adopted this - Canada since 1974, the U.S. since 1985.
- It stabilizes workers' real tax burden and increases tax system predictability.
📕 Bracket Creep
Bracket creep happens when nominal income rises due to inflation, but tax brackets stay the same, causing tax burden to increase without real income growth.
- Also called an "automatic tax increase effect," where tax revenue naturally increases even without raising tax rates.
- Workers experience getting a raise but paying more taxes, so the money they actually take home doesn't increase much.
- Long-term, this continuously increases the middle class's tax burden.
📕 Gift Tax
Gift tax is imposed when receiving property for free, and must be paid even between parents and children above certain amounts.
- Between parents and children, up to 50 million won over 10 years is exempt (20 million won for minors), with 10-50% tax rates on amounts above that.
- Recently, attempts to avoid taxes while gifting high-value apartments in children's names have increased.
- The tax agency imposes penalty taxes on top of the original tax when catching such tax avoidance schemes.
📕 Tax Bracket
Tax brackets are thresholds where different tax rates apply based on income amount - higher income means higher tax rates.
- Currently, Korea has 8 brackets ranging from below 12 million won (6%) to over 1 billion won (45%).
- If these brackets stay the same while prices rise, people can move into higher tax brackets even without real income changes.
- Inflation indexing means adjusting these bracket standards each year to match inflation.
3️⃣ Principles and Economic Outlook
✅ Problems with Bracket Creep and Solutions
Let's look at problems that occur when tax standards are fixed during inflation and their solutions.
First, bracket creep creates a real tax increase effect. Tax revenue automatically increases just from inflation, even without raising tax rates. For example, say an office worker earning 50 million won gets a 3% raise (matching inflation) to 51.5 million won. Their real purchasing power is the same as last year, but if tax bracket standards stay the same, they might face higher tax rates due to the progressive tax structure. Long-term, this continuously increases the middle class's tax burden.
Second, inflation indexing can solve this, but system design is complex. It's not just about adjusting tax brackets. Basic deduction amounts, earned income deductions, child deductions, pension savings deductions, and various other deduction limits must all be adjusted together. Also, decisions must be made about which inflation indicator to use (Consumer Price Index, GDP Deflator, etc.) and how often to adjust (annually, biennially, etc.). Looking at OECD countries, Canada adjusts automatically every year, and the U.S. uses the Consumer Price Index as its standard.
Third, balance is needed between tax revenue concerns and fiscal soundness. From the government's perspective, inflation indexing reduces tax revenue. Especially in current situations with increasing welfare spending, revenue reduction is burdensome. Therefore, inflation indexing must be discussed alongside other revenue sources or spending restructuring. The tax commissioner's mention of a "mid-to-long-term initiative" reflects the need for this complex adjustment process.
Inflation indexing increases tax system fairness, but gradual implementation considering fiscal conditions is realistic.
✅ Reality of Parent-Funded Gifts and Tax Enforcement
Let's analyze increasing cases of tax avoidance gifts and the tax agency's response plans.
First, high-value apartment gifts are increasing along with tax avoidance attempts. Recently, as Gangnam area apartment prices exceeded 2 billion won, parents face huge gift taxes when directly gifting to children. For example, gifting a 3 billion won apartment requires paying about 1.2 billion won in gift taxes after deductions. To avoid this, some arrange paperwork to make it look like parents "loaned" money when buying homes in children's names. But often children have no ability to repay or don't properly pay interest.
Second, the tax agency uses various data to detect tax avoidance gifts. They comprehensively analyze real estate transaction information, financial transaction records, and income data to find transactions impossible based on children's income levels. For example, if a 20-something office worker earning 40 million won buys a 1 billion won apartment, they thoroughly investigate the money source. To determine if money from parents is a "loan" or "gift," they check IOU documentation, interest payment records, and repayment plans.
Third, when gift tax avoidance is caught, penalty taxes are added, increasing the burden. When tax avoidance gifts are detected, reporting non-compliance penalties (20%) and late payment penalties (annual 10.95%) are added on top of the original tax. For example, if caught avoiding 500 million won in gift taxes, close to 700 million won including penalties might be owed. The tax agency also uses a strategy of publicizing such cases in the media to raise awareness.
Strong crackdowns on tax avoidance gifts are measures to ensure tax fairness and establish a culture of honest tax payment.
✅ Future Outlook and Policy Implications
Let's forecast how inflation-indexed income tax and gift tax enforcement will affect the overall tax system.
First, inflation indexing is likely to proceed gradually. Since adjusting all items at once is difficult, adjusting tax brackets first then gradually expanding to various deduction items is expected. Also, rather than automatic annual adjustments, a compromise of adjusting every 2-3 years reflecting inflation might emerge. The tax commissioner's use of "mid-to-long-term initiative" seems to consider this gradual approach.
Second, strengthened gift taxation will contribute to reducing wealth polarization. Ensuring proper taxes are paid when inheriting parents' property can prevent wealth concentration in specific families. This is important for equal opportunity and fair competition. However, some criticize this as excessively regulating even people trying to honestly pay taxes and pass on property, so clarifying standards to distinguish normal gifts from tax avoidance schemes is important.
Third, tax reforms affect perceptions of fairness throughout the economy. When unfairness of workers paying more taxes due to inflation improves, and wealthy people's schemes are cracked down on, trust in tax justice increases. This leads to establishing a culture of honest tax payment, making the long-term tax base stronger. Conversely, if unfairness continues, tax resistance grows, making policy implementation difficult.
Tax reform is an important policy affecting not just tax issues but overall societal fairness perceptions and economic vitality.
4️⃣ In Conclusion
The tax agency's announcement shows determination to make the tax system fairer and more reasonable. It's a two-way strategy to prevent workers' tax burden increases from inflation while cracking down on wealthy people's tax avoidance gifts to increase tax fairness.
Inflation-indexed income tax is already common in developed countries. In Korea too, if tax standards stay the same while prices continuously rise, a real tax increase effect occurs. Inflation indexing is needed especially to solve the problem of middle-class workers' felt tax burden continuously increasing.
However, implementing the system requires complex processes. Not just tax brackets but various deduction items must be adjusted together, and decisions about which inflation indicator to use and how often to adjust must be made. Also, since fiscal impacts from revenue reduction must be considered, a gradual approach is realistic.
Meanwhile, strong crackdowns on parent-funded gifts are also an important policy direction. Avoiding taxes while gifting high-value apartments in children's names harms tax fairness. People who honestly pay taxes feel relatively deprived, and society's overall fairness perception decreases.
The tax agency using various data to detect tax avoidance schemes and imposing penalty taxes is an effective way to raise awareness. However, presenting clear standards to distinguish normal gifts from schemes so honest taxpayers don't suffer disadvantages is also important.
Long-term, such tax reforms will increase trust in tax justice and establish a culture of honest tax payment. A balanced approach that reduces workers' real tax burden while preventing wealthy people's schemes will contribute to raising society's overall fairness perception.
Ultimately, this policy direction is evaluated as establishing the principle of 'protect working people, crack down on those using schemes.' Since complex system improvements are needed, gradual implementation is necessary, but the direction must be firmly maintained.
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