Revamp the tax code for the middle class

A salaried employee would feel that everything has increased, except for his monthly salary. But on the data, this is not entirely true. Salaries have increased by 5% per year on average. In February, the Federation of Korean Trade Unions demanded an 8.5% wage increase. Unions would argue that wages should rise with inflation. After wage negotiations, wages in Korea increased by about 5% on average per year.

However, most employees can only complain these days. The surge in consumer prices this year is one of the reasons. The income tax code that does not reflect inflation is another. The income tax rate must be adjusted for inflation, which is the case in most advanced economies.

Suppose the annual salary will be increased by 5% this year for an employee from 50 million won ($38,461) to 52.5 million won. In this case, real income would be negative since inflation has risen 6% so far this year.

The income tax code is revised over several years. But the income tax rate for employees of 88 million or less has remained the same for the past 12 years. In 2010, the tax rate for the income bracket of 12 million won or less was lowered to 6% from 8%, the income bracket from 12 to 46 million won to 15% from 16% and the 46 million-won tranche to 88 million won at 24% from 25%. Despite inflation gains over the years, the income tax rate is unchanged.

The government increased the tax bracket to eight by adding the top category of one billion won or more to the maximum rate of 45%. While increasing the tax on the wealthy, the tax for the low-income middle class remained the same. Amid a growing income gap with stagnation for the middle or working class, broader wage earners have felt a greater fiscal pinch. Even for those who collect 100 million won in income, there is not much left in the bank account after various social taxes.

While employees’ monthly wages increased by an average of 17.6% from January to October last year compared to 2016, labor income tax and social insurance contributions increased by 39, 4%. The new government must focus on long-term regulatory reforms, but it must also seek to help the middle or working class struggling with high prices. If the income tax rate is streamlined, union demand for wage increases may decrease. Before Deputy Prime Minister for Economic Affairs Choo Kyung-ho pleads with employers not to raise wages too much due to inflationary pressure, he needs to address the sclerotic tax code for the middle class.

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