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T he speaker of the ruling party, Hon. Hong Young-pyo emphatically laid out two of the most urgent issues of the nation in his recent speech at the plenary session. There, he pointed out that correcting the worsening inequality and deepening polarization is crucially important for the future of the country. Although he spoke of it separately, inequality and polarization are virtually the same thing, seemingly differing only in its extent. Indeed, as French economist Thomas Piketty has rightly emphasized, growing inequality and polarization pose a serious threat to social integrity and solidarity, rendering democratic foundation of a nation in great peril. Like Mr. Piketty, the ruling party speaker Mr. Hong strongly implicated introducing a wealth tax in his speech to reduce inequality for a better future, and a recent nationwide survey showed that 67 percent of the people favor the introduction of a wealth tax.
The wealth tax could reduce the extreme concentration of power and influence, and its revenue could be spent to promote innovation and efficiency by shifting tax burdens away from labor and productive investment. Also, the society could enhance the egalitarian standard of fairness. But neither the speaker nor the ruling party has yet laid out the specific details of the wealth tax so far, creating conundrums in the investment world. None would dispute the danger of deepening inequality, but concerns about the uncertainty or lack of clarity as to the future wealth tax have emerged. Here are some of the typical ambiguities about the wealth tax.
First, the idea of whether the wealth tax should be levied on the income or the net assets. If it is imposed on income, then it should be called an income tax, not a wealth tax. But in Korean politics, a wealth tax usually refers to an income tax for the super-rich who make multi-million dollars a year for instance, but Korea already has a tax for the rich. In terms of a tax on assets, Korea also has a system of tax on real estate, called the property tax, either on the land or on the building structure(s). So, the issue regarding the wealth tax is not on whether or not to newly introduce it, but rather, how broadly the rate should be applied on the various kinds of assets.
The second uncertainty is based on what the marginal tax rates should be. Currently, the highest bracket for the income tax is KRW 500 million (approximately USD 4.4 million), with a marginal tax rate of 46.2 percent. The tax rate could be raised to a higher level, or create yet another higher bracket with a higher rate, but it is entirely unclear which income group will be the target and what the tax rate should be. For the property tax, the highest rate is 0.4 percent for real estate of over KRW 300 million, and 0.5 percent for land valued over KRW 100 million. However, for people holding more than KRW 600 million, the tax rate progressively surges from 0.5 percent to a maximum of 3.0 percent to those with properties worth more than KRW 9.4 billion. This is called the general property tax, which was revised in 2018 under the new government. The only exemption is an individual with one house worth less than KRW 1.2 billion, who just pays the regular property tax. The current government seems to be considering revising this general property tax system once more, lowering the highest tax rate threshold (KRW 9.4 billion and up) and the marginal tax rates, but nothing is clear at this moment.
The third important issue is whether all the financial assets such as equities and savings should be made subject to the wealth tax. So far, stock holdings are not subject to any tax except for a trading tax of 0.3 percent. Bank savings are also excluded from the wealth tax, but its interests or dividends up to KRW 20 million, approximately USD 17,000, are subject to a 15.4 percent withholding income tax. Therefore, the current tax system is criticized as being unfair, giving too little tax burden on financial assets.
Another non trivial question is whether the outstanding mortgages on the property should be deducted from the property taxes. As loan holders should pay interest, the property tax amounts to a double-taxation on the same property. In most cases, the wealth tax system allows deduction of liabilities on the assets, and that is why it is called a ‘net’ wealth tax.
Opponents of the wealth tax have cited a series of factors, including the potential risk of capital flight, unconstitutionality, valuation problems, negative effects on senior citizens, as well as unsurmountable administrative costs. The introduction of new wealth taxes could cause the rich to leave the country or take wealth out to avoid paying taxes. This could be avoided if an exit tax is introduced. Unfairly high rates of taxes imposed on the rich could evoke the issue of unconstitutionality, but it is not as serious in Korea as in other countries. A valuation problem has been a critical issue for a long time, but gradually, the tax base has rapidly approached the market value in Korea. As senior citizens tend to possess relatively more assets than the younger generation in preparation for retirement, the wealth tax could unfairly jeopardize the older generation. This could be dodged if the wealth tax is levied for people with extraordinary wealth, such as USD 50 million as U.S. Senator Elizabeth Warren suggests. A new wealth tax system could improve fairness and equality of society, but equally, it would arouse a series of uncertainties and opposition making new investment unstable and daunting. This the reason why a thorough reconsideration is necessary.
By Professor Se Don Shin
Dean, Sookmyung Women’s University
The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA