hankyoreh

By Ryu Yi-geun, staff reporter

The top one percent of earners in South Korea are making more than nine times the average for all paid workers, according to a National Tax Service report obtained by the Hankyoreh.

In particular, the figures showed an overall income of 26 times the national average for the top percentile of people earning business income and asset income from sources such as real estate rentals, interest, and dividends.

Through Democratic United Party lawmakers An Min-suk and Hong Jong-haak, the Hankyoreh was granted exclusive access on Sept. 5 to a National Tax Service (NTS) report on 2009 earned income tax and comprehensive income tax percentile data. According to this report, the highest-earning one percent (85,411 people) of the 8,541,168 paid workers filing earned income tax returns had an average annual per capita income of 243.2 million won, or around US$214,000.

The top one percent (35,078) of the 3,570,816 people paying the composite income tax, which mainly applies to the self-employed, had an average income of 579.6 million won, or about US$510,000.

These figures are respectively 9.1 and 26.1 times larger than the average paid worker income of 22.22 million won (US$18,990) given by the National Statistical Office (now Statistics Korea) in 2009.

In this case, earned income refers to the amount left over from total pay after deductions for meals, non-taxable income like driver subsidies, and earned income credits. Typically, non-taxable income and pay eligible for earned income deductions account for around 20% of total earnings.

The gap separating the “super-rich” top one percent and the rest of workers is believed to be even greater than these figures suggest. The NTS percentile figures only reflect people who paid earned income and composite income taxes. In 2009, the country had 14.29 million paid workers, of whom 40%, or 5.75 million, earned less than the standard and paid no earned income tax. Similarly, nearly half of the self-employed do not pay any composite income tax.

The figures also showed a clear clustering of income at the top one percent. Total income earned by the top percentage of paid workers stood at 17.4 trillion won (about US$15.4 billion), or 7.9% of the 220.9 trillion won (US$176.8 billion) of overall earned income. The top five percent accounted for 20% total national income. In the case of comprehensive income in particular, the top percent’s 20.7 trillion won (US$18.2 billion) was no less than 22.9% of the overall 90.2 trillion won (US$79.4 billion) earned. For the top five percent, the number rose to 43%.

This is the first time the NTS has released income tax percentile data, showing the true extent of the country’s income inequality. In the past, it refused to do so, citing the need to protect taxpayer information.

“Many people wanted to know how much income was clustered in the different percentiles, and now they have the chance to see in detail,” said An Min-suk of the DUP.

The lawmaker advised lowering the bracket for the maximum income tax rate of 38% in order to relieve the concentration, which he called “very serious.”

National Assembly pays lip service to need for higher taxes　

NTS figures indicate that despite so much income being clustered in the top percentile, its members are actually paying little in taxes relative to the income tax and nominal tax rates. As a result, many politicians and others are demanding that the minimum post-deduction income for application of the maximum income tax rate be lowered.

The income tax percentile numbers indicate that among the 8.54 million people who paid earned income taxes in 2009, the top one percent paid 3.9 trillion won (US$3.5 billion) in taxes, out of a total income of 17.5 trillion won (US$15.4 billion), meaning 23% of their income was paid in taxes.

This earned income did not include non-taxable income and earned income deductions, which typically represent about 20% of overall pay, so the effective tax rate, or the percentage of taxes from actual pay, is much lower than 23%. Given that the 2009 maximum tax rate (for income of 88 million won, or approximately US$75,200) stood at 35%, this means cuts and deductions have left the top one percent with a much lower tax burden. The effective tax rate is now less than two-thirds the maximum tax rate.

And because the top percent is earning an average of over 200 million won (US$176,000), most of its members are in the maximum income tax bracket. For the top five percent, the percentage of taxes out of earned income falls to 15.5%.

The same phenomenon appears with composite income tax: the top one percent is paying 27% of income in taxes, while the top five percent is paying 22%. Because the income tax system is progressive, the top 10% of earners are obviously paying a large portion of overall composite income taxes - about 85%. The number is high compared to the 57% rate of earned income out of composite income. But many critics say it should be higher for the top earners, given the large amount of after-tax income left over and the wide gap between the highest and lowest percentiles.

Hong Jong-haak’s office claimed that the top 10% for composite income was making 49 times what the bottom 10% made, while the top decile for earned income made 12 times what the lowest decile did.

“Given how low our effective income tax rate (tax divided by income) is relative to the OECD average, there is a lot of room for the top earners to pay more in taxes,” the office said.

That part is true. South Korea’s income tax burden is quite low: just 3.6% of GDP, compared to 8.7% for the average OECD member nation. One reason for this is the large number of people under the tax exemption threshold, but another is the plethora of non-taxable income sources, tax cuts, and deductions. And those benefits only get bigger the higher one is up the income ladder.

In spite of this, a tax law amendment announced by the government on Aug. 8 did not include any of the initially pledged changes to the income tax bracket system. It was also very limited in the scope of its non-taxable income designations and tax cuts. Now that the ball is in the National Assembly’s court, politicians on both sides of the area are clamoring for adjustments to the income tax system. The DUP is working to lower the minimum income for assessment of the maximum rate of 38% from its current 300 million won (US$264,000) to 150 million won (US$132,000). From the New Frontier Party, policy committee deputy chairman Na Seong-lin recently said the tax bracket system should be adjusted so that the top 30% of earners pay more.

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