Ruling party seeks to raise tax threshold on financial gains

[Graphics by Song Ji-yoon and Chang Iou-chung ]

South Korea‘s ruling party is looking to raise the tax threshold for annual comprehensive financial gains, a bid to make it easier for lower- and middle-income earners to accumulate wealth and help narrow the class divide.

Political sources said Wednesday that the ruling People’s Power Party plans to propose an amendment to the Income Tax Act. The amendment aims to double the current financial income threshold under the comprehensive financial income tax to over 40 million won ($29,300) from over 20 million won in the third quarter of 2024 during the upcoming National Assembly session.

Under the proposal, financial income (the sum of interest income and dividend income) below the threshold will be subject to a separate tax rate of 15.4 percent, including regional taxes, and a combined rate of 6.6 to 49.5 percent will apply to amounts above the threshold. Currently, if financial income exceeds 20 million won in a year, the excess amount is taxed at up to 49.5 percent (including regional taxes).

The comprehensive financial income tax was introduced in 1996 with the aim of taxing the wealthy further. However, the recent surge in stock investors and rising interest rates has led to concerns that even the middle class, who engage in average levels of financial transactions, are bearing a heavy tax burden. This is because the tax threshold has remained the same for over a decade despite social changes, resulting in non-wealthy individuals having to pay the “wealth tax”. If the proposed amendment is approved and becomes effective within the year, it will be the first change in the threshold in 11 years.

The proposed 40 million won threshold is the same as when the comprehensive financial income tax was first implemented. At that time, however, the threshold was based on the combined financial income of a married couple, not an individual, but the Constitutional Court‘s 2002 ruling led to the abolition of the couple-based system and a shift towards the threshold to individual income. Following criticisms that the 40 million won threshold for individual income was too high, it was lowered to 20 million won in 2013 and has remained at that level for over a decade.

With the impact of high interest rates, the number of people with annual financial income exceeding 20 million won has increased significantly, leading to calls for raising the threshold again. An analysis of the National Tax Service’s comprehensive income tax data by the Maeil Business Newspaper on Tuesday showed that the reported amount of comprehensive financial income tax soared to 25.51 trillion won in 2022 from 3.64 trillion won in 2002, a sevenfold increase. Unlike in the past, the average citizen is now actively investing in financial products and stocks, with the nation‘s interest and dividend income growing at an average annual rate of 10.2 percent.

According to the Korea Securities Depository, the number of individuals investing in the country’s stock market increased to over 14.03 million last year from 3.36 million in 2002, more than a fourfold increase.

The overall increase in national income also supports the need for a change in the threshold. According to the Bank of Korea, the nation’s gross domestic product per capita stood at $12,261 in 2000, but this rose to $33,128 in 2023, a 2.7-fold increase. When converted to Korean won, GDP more than tripled to 43.25 million won from 13.86 million won during this period. With the expected mid-2 percent growth in 2024, national income is projected to increase again after a period of stagnation.

Standard & Poor’s predicted that Korea‘s per capita GDP will hit $37,700 next year and exceed $40,000 for the first time in 2026, reaching $40,500. When converted at the average exchange rate for the first quarter of this year, it will exceed 50 million won from 2025 onwards.

A member of the ruling party stated that raising the tax threshold will help the middle class build wealth and boost domestic consumption, hinting at the ongoing discussions within the party about adjusting the threshold in response to high interest rates. An official from the Ministry of Economy and Finance indicated that the government would review the proposed bill, but stressed the need to consider numerous factors, including fiscal and tax equity.