The government is reported to be reviewing plans to transition the current 'individual-based' income tax system to a family-friendly model.
It is about incorporating 'couple unit (American style)' or 'family unit including children (French style)' into the current tax base system, which applies only on an individual basis. This would expand the tax brackets, significantly reducing the actual tax burden for married couples and households with multiple children.
Although there is a need to provide extraordinary incentives for marriage and childbirth to respond to the extreme low birthrate seen as a national survival issue, the decrease in tax revenue poses a challenge.
According to the National Planning Commission and related departments on the 22nd, the Ministry of Economy and Finance is reported to have presented the direction of the tax reform, including this content, in a closed session during the National Planning Commission's Economic Division report last week.
'Family-friendly tax base' is a large task that fundamentally alters the income tax system. It appears that significant discussion will be necessary before final implementation.
In the American-style tax base system, individuals or couples can choose between the two options. If the couple unit is applied, the tax bracket nearly doubles, thus reducing the actual tax burden accordingly. The tax savings effect grows for 'single-income households.'
The French-style system calculates the tax brackets by adding the number of children, meaning the more children a family has, the more significantly the burden is reduced. Taxes are assessed after dividing the parental income by the family coefficient (N), and then the coefficient is multiplied again in an 'N to the power of N' manner.
According to an analysis by the Korea Institute of Public Finance, tax revenue is expected to decrease by 24 trillion won under the couple unit tax base and by 32 trillion won under the 'N to the power of N' system.
Therefore, the introduction of a family-friendly tax base may also require measures such as reducing existing deductions and increasing tax rates to offset the loss of tax revenue.
The Ministry of Economy and Finance is understood to be in favor of 'long-term review' regarding the ripple effects related to the decrease in tax revenue and tax fairness. Since the issues intersect with marital status, dual-income and single-income scenarios, and the presence of children, social consensus is also required.
Additionally, it has been reported that there are plans to further expand child tax credits. Currently, tax credits of 250,000 won for the first child, 300,000 won for the second child, and 400,000 won for the third and subsequent children are applied.
The Ministry of Economy and Finance is said to be reviewing specific measures and timelines for the expansion of child tax credits in connection with President Lee Jae-myung's pledge to expand the age for child allowance payments from 8 years to under 18 years.
There are also plans to raise the income deduction rate and limits on credit card usage based on the number of children. For example, applying a maximum limit of 1 million won per child along with a basic deduction of 500,000 won.
The tax authorities plan to include measures for supporting childbirth and child-rearing in the tax reform proposal for 2025 as soon as alternatives are prepared.
Additionally, there are plans to include elementary school extracurricular academy fees and usage fees for sports facilities in the education tax credit category as reflected in the report.
Applying this to all elementary school children could promote private education and disproportionately benefit high-income families; therefore, it is suggested to limit it to 'lower grades in elementary schools' where care is particularly needed.
The tax credit for preschool children may be adjusted to focus solely on extracurricular academies.
The monthly rent tax credit is also expected to be reformed to expand benefits for households with multiple children.
Currently, the monthly rent tax credit is available only for dwellings with a national housing standard or assessed value of 400 million won or less, but the plan is to raise the target dwelling size for households with multiple children.
The relaxation of income standards for eligible individuals aims to focus support on households with multiple children that need to reside in larger dwellings, considering the contradiction with the intent to support low-income and middle-class non-homeowners.