This year, the national tax reduction is expected to reach 78 trillion won, the largest in history, and there is keen interest in whether the tax policy, which has faced criticism for needing to be abolished or reduced, will come to an end. The Ministry of Economy and Finance anticipates that the national tax reduction rate will exceed the legal limit for the third consecutive year, and they are in a situation where excessive tax reductions need to be prevented.

According to the Ministry of Economy and Finance on the 6th, the sunset deadline for 105 items within overall tax expenditure this year is approaching. The Ministry plans to conduct mandatory in-depth evaluations on 23 tax expenditures with annual reduction amounts exceeding 300 million won to analyze performance and develop improvement measures.

The total reduction amount for the 23 items subject to mandatory in-depth evaluation this year is provisionally reported to be 15.8 trillion won based on last year's figures, accounting for 22.1% of the total national tax reduction. Among these, 13 items have had their sunset deadlines extended more than six times.

The evaluation feedback results for the tax benefits items subject to compulsory in-depth evaluation in 2025./Courtesy of National Assembly Budget Office

Some tax benefit policies have received suggestions for 'system redesign' or 'reduction' in a prior in-depth evaluation. The National Assembly Budget Office pointed out that among the tax benefit items set to sunset this year are tax deductions for amounts spent on credit cards, special tax reductions for small and medium-sized enterprises, tax benefits for non-taxable comprehensive savings, and tax benefits for joint corporations.

◇ The 'credit card usage deduction' extended 10 times... Difficult to abolish due to opposition from workers

In particular, the deduction for credit card usage amounts is a tax benefit system that has garnered agreement within the Ministry of Economy and Finance for not being very effective. This system allows a deduction of some (15-30%) from taxable income when the amounts spent on credit, debit, prepaid cards, or cash receipts exceed 25% of total salary.

The government introduced this policy in September 1999 to enhance transaction transparency through the activation of card payments. It was also aimed at resolving the issue of tax equity between employees and self-employed individuals.

However, this system is still maintained even though the proportion of cash usage among total expenditures has declined to 20%. It has been extended a total of 10 times. Critics argue that if the income deduction is abolished or reduced, it could lead to decreased consumption.

In this regard, a source from the Ministry of Economy and Finance stated, "Just because you deduct credit card usage does not mean people will consume more; it merely benefits those who spend a lot. There is no effect, and it only depletes tax revenue." According to the National Assembly Budget Office, the estimated reduction amount from this deduction last year was 4.1 trillion won.

◇ Special tax reductions for small and medium-sized enterprises are not effective... Significant backlash from SMEs

The special tax reductions for small and medium-sized enterprises have consistently faced criticism for needing to be reduced in the long term. This system was first introduced in 1992 to provide temporary special tax reductions for small manufacturers at risk of bankruptcy and has since expanded to cover a total of 48 sectors.

The scale of tax expenditure for this system is estimated to have reached 2.3 trillion won based on last year's figures. It lacks specific economic activity criteria for investment, employment, research, and human resource development, allowing small and medium-sized enterprises that meet the legal definition easily to reduce their tax burdens.

As a result, there are claims that this system is 'not much different from subsidizing profitable small enterprises.' The Korea Tax Policy Research Institute previously criticized that "the target small enterprises are too broad, which makes it impractical to operate, and no distinctions are made in support benefits regardless of whether they are capable small enterprises or micro-enterprises."

However, there is expected to be significant backlash from small and medium-sized enterprises if this tax policy is abolished. The special tax reductions for small and medium-sized enterprises are anticipated to deepen the polarization between large and small enterprises in the long term and could lead to the exit of small and medium-sized enterprises, making abolition difficult.

A representative from a small and medium-sized enterprise stated, "If there are almost no subsidies and tax reductions are also eliminated, will there be any reason for small enterprises to remain in or invest in Korea? While it may save taxes in the short term, the more important thing is to ensure that corporations can sustainably pay taxes in Korea."

◇ "Improvement of the in-depth evaluation system is necessary"

Although the Ministry of Economy and Finance is conducting 23 in-depth evaluations this year, many believe that even if there are suggestions for abolishing or reducing the provisions in this evaluation, the likelihood of them sunsetting is low.

According to the National Assembly Budget Office, a total of 109 mandatory in-depth evaluations have been conducted since 2015, but only six items were actually abolished. Despite opinions calling for the abolition (6 items) or long-term reduction/abolition (18 items), the sunset has been extended.

As a result, there are calls for finding ways to ensure that the in-depth evaluation system operates efficiently for the sunset of tax benefit policies or to find alternatives.

Jang Seol-hee, an analyst at the National Assembly Budget Office, stated, "The sunset extension should only be proposed if the in-depth evaluation results acknowledge both validity and effectiveness. Even if there is validity or effectiveness, if it is determined that the policy goals have been achieved, it is necessary to consider reviewing the abolition of the system."

Previously, the Legislative Research Service proposed a method for automatically sunsetting the tax benefit system. Hwang Seong-pil, a legislative researcher at the National Assembly Legislative Research Service, suggested in a report released at the end of 2023 that "to enhance the intent of the sunset system for tax benefits, two sunset extensions should be allowed, but once the sunset deadline arrives, it should automatically sunset." He added, "If it becomes necessary to extend the sunset period more than three times, the tax benefit system should be reintroduced."