Tax Reform in 2000
The 2000 tax reform focused on strengthening support for the middle and working class to enhance tax equity within the framework of overall economic policy of restructuring and building up a system based on market principles. Also, tax rules, which proved to be ineffective, were revised to improve efficiency of tax system.
1. Lessen the tax burden for the middle and working class
In order to lessen the tax burden of the middle and working class and improve income inequality, pension contribution was allowed to be deductible from the taxable income and the scope of credits for medical expense and earned income were expanded. Non-taxable savings for the old and the disabled were established. Meanwhile, with the aging population, those who receive pension income is going to increase. Thus, the proportion of pension income in the total income is expected to augment. Pension proceeds, which are currently non-taxable, will become taxable on a gradual basis, enhancing tax equity among various incomes.
2. Energy-related taxation system
The current energy-related taxation system has been based on low energy prices for the sake of price stability and industry support. As a result, during 1991 to 1997, energy consumption in Korea soared 11.4%, eight times of OECD member nations while the consumption for OECD nations increased by 1.5%. Despite the fact that main contributors to pollutions are factory exhausts and car exhausts, heavy oil used in factories was non-taxable and tax on diesel for automobiles was lower than that of advanced nations. The number of butane gas-powered cars sharply increased, as the price of butane gas was only one forth of gasoline price. The large difference among fuel of vehicles contributes to distortion in energy consumption. To address energy waste, pollution and international payment problem arising from these distorted energy prices, taxation system for energy was modified to be in line with the level of international standard. The price rates among gasoline, diesel oil and butane gas will be revised upward to 100: 75: 60 on a gradual basis by July 2006.
3. Tax incentives
Tax incentives were provided to boost local economies and regain Korean economic rigor by narrowing economic gaps among regions. Previously income tax and corporation tax had been reduced by 20% for seven industries such as manufacturing and logistics industry etc. In 2000, a total of 16 types of local small and medium-sized enterprises (SMEs) including construction, retail and wholesale industries were given income tax and corporate tax cuts by 30%.