Korea expands tax deduction on traditional market spending

[Photo by Yonhap]

The South Korean government will raise the income tax deduction rate for spending in traditional markets in 2024 to 80 percent from 40 percent, in a bid to stimulate domestic consumption.

The government and the ruling party reached an agreement on the measure following a meeting to address economic policies for 2024 held at the National Assembly on Wednesday, with the government making the recovery of the household economy its policy priority for the year.

The measure appears to be rooted in the belief that increasing income tax deduction rates is an effective way to boost domestic consumption as high inflation and interest rates persist. Both the government and the ruling party also anticipate that small business owners will receive indirect support.

Expanding the deduction rate for traditional market spending to 80 percent from 40 percent will require an amendment to the special tax law, but other deduction benefits have already been confirmed. The tax revision passed by the National Assembly at the end of 2023, for example, included an additional income deduction, limited to 1 million won, for credit card spending exceeding 105 percent of the previous year’s spending. Under the revision, the threshold for income eligibility for monthly rent tax deductions has also been increased to a total annual income of 80 million won ($61,000) from 70 million won.

However, critics argue that resolving household debts should be the priority, as high household debts are the main cause of stagnant domestic consumption. “While the government is encouraging consumption by expanding various income tax deductions, the fundamental problem is the high level of household debt,” Hansung University economics professor Kim Sang-bong said. “Reducing total household debt through measures like debt service ratio regulations will be necessary to stimulate consumption,” he added.

Further measures to boost domestic consumption were also announced following the government-ruling party meeting. These include a 200,000 won reduction in electricity charges for 1.26 million small business owners per business in the first quarter of 2024, a reduction of over 2.3 trillion won in interest for self-employed individuals and small business owners, and a revision of the feasibility assessment system for research and development projects.