Tax

Money or goods compulsorily collected by the state or local governments from individuals and corporations under the law to fund public expenditure. It is the core of fiscal revenue and functions as a

Tax

Overview

A tax is money or goods compulsorily collected from citizens by the state or local governments as prescribed by law in order to secure necessary financial resources. Taxes are the core fiscal revenue through which governments supply public goods (defense, public order, administration, infrastructure, etc.) and operate social security systems. Taxes also function as a policy tool for realizing various economic and social goals, including income redistribution, economic stabilization, and industrial and environmental policies. In general, taxes are regarded as essential to the existence and development of a state and establish a legal relationship between the state and its citizens.

Main Content

History and Theory of Taxation

Taxes have existed since ancient civilizations. In Egypt, Rome, and elsewhere, land taxes and poll taxes were imposed; in the Middle Ages, there were tithes paid to the church and various labor obligations and payments in kind to feudal lords. In the modern era, the principle that taxes, while restricting the property rights of citizens, require the consent of the people's representatives (parliamentary principle of no taxation without representation) was established. Adam Smith, in The Wealth of Nations, proposed the principles of a good tax system: equality, certainty, convenience, and economy, which remain the basic standards for tax systems today. After John Maynard Keynes, the theory emerged that taxes should actively perform the macroeconomic functions of stabilizing the economy and redistributing income.

Classification of Taxes

Taxes can be classified according to various criteria. By imposing authority, they are divided into national taxes imposed by the state and local taxes imposed by local governments. By taxable object and method, there are income taxes imposed on income (individual income tax, corporate tax), consumption taxes imposed on consumption (value-added tax, individual consumption tax, liquor tax), and property taxes imposed on the holding and transfer of property (land tax, housing property tax, inheritance tax, gift tax). Taxes are also divided into direct taxes and indirect taxes depending on whether the tax burden can be shifted. Direct taxes are taxes that the taxpayer bears and cannot easily shift to others, while indirect taxes are included in the price of goods and shifted to consumers. In Europe, this classification is also important as a basis for allocating fiscal revenues.

In addition, by rate structure, taxes are classified as progressive taxes (higher rates applied as income increases), proportional taxes (same rate applied to a certain level of income or consumption), and regressive taxes (taxes whose burden rate is higher for lower incomes). Progressive taxes are favorable for income redistribution, while proportional and regressive taxes have lower collection costs but tend to increase the relative burden on low-income groups.

Major Types and Roles of Taxes

Income tax is imposed on an individual's earned income, business income, interest income, and so on. It adopts a progressive rate structure, with different rates applied to tax base brackets according to income level. In Korea, rates range from 6% for taxable income up to KRW 14 million to a maximum of 45%. Corporate tax is imposed on corporate profits and regulates the distribution of burdens among stakeholders such as shareholders, executives, and employees of the corporation.

Value-added tax (VAT) is a tax imposed on the value added created in the process of transactions in goods and services. It is collected by businesses issuing tax invoices and deducting input tax from output tax. It does not impose double taxation at preceding stages and is a type of consumption tax, but in practice it is paid by businesses. Individual consumption tax is imposed on luxury goods and certain activities (gambling, distribution, etc.). Property tax has land, buildings, and housing as its taxable objects and belongs to local taxes. Inheritance and gift taxes are imposed on property transferred without consideration upon death or donation, thereby mitigating the intergenerational transmission of wealth and enhancing tax equity.

Acquisition tax, registration and license tax, automobile tax, and resident tax are key revenue sources for local governments. Customs duties and the transportation, energy, and environment tax have the character of being imposed for specific purposes.

Taxes and Economic Policy

Taxes are not only a source of government expenditure but are also used as incentives to guide the behavior of economic agents. For example, carbon taxes and environmental taxes impose burdens on carbon-intensive industries, promoting a transition to eco-friendly industries. Tobacco taxes and liquor taxes aim to curb consumption to protect public health, but they are also means of securing fiscal revenue. Tax credits to promote corporate investment, tax support for research and development expenses, and the comprehensive real estate tax for stabilizing the real estate market are examples of tax policy combined with industrial, real estate, and welfare policies.

The tax burden ratio indicates the share of taxes in the national economy and reflects the size of a country's public finances and the level of social security. Korea's tax burden ratio (national and local taxes combined / nominal GDP, approximately around 30% as of 2023) is lower than the OECD average, and it is about 33% when social security contributions are included. Taxes cover most of the government budget, with the remainder financed through government debt issuance and other means.

Principle of No Taxation without Representation and Taxpayer Rights

The principle that taxes may only be imposed and collected under laws enacted by the parliament, the representative body of the people, is a constitutional principle. The state may not impose or collect taxes without a legal basis, and citizens bear predictable tax burdens. In addition, to ensure taxpayers' faithful payment, relief systems are operated, including tax investigations, objection procedures against unlawful dispositions, the National Tax Service, and the Tax Tribunal.

Latest Trends

The global tax environment in 2024–2025 faces the problems of the digital economy and profit shifting by multinational corporations. With the implementation of the OECD and G20-led Pillar 2 global minimum tax rate (15%), large corporations must meet the minimum rate in each country, and countries are revising their domestic legislation. Negotiations on digital services taxes and taxation of big tech continue. The European Union (EU) has introduced the Carbon Border Adjustment Mechanism (CBAM), deciding to impose a certain cost on carbon emissions embedded in imported goods; taxes are now evolving into forms combined with direct environmental regulation.

The development of artificial intelligence (AI), cryptocurrencies, and the platform economy is threatening the ability of tax authorities to identify taxable sources. Accordingly, Korea is pursuing the expansion of mandatory electronic tax invoice issuance, the submission of virtual asset information, and the establishment of a taxation base starting in 2025. Internationally, countries are strengthening the automatic exchange of tax information and the registration of beneficial owners of corporations, and introducing public reporting systems to increase the tax transparency of global companies. Domestically, the easing of the comprehensive real estate tax, discussions on rationalizing inheritance tax, and temporary fuel tax cuts to reduce oil price burdens are points of controversy.

In addition, as national debt has surged after the pandemic, discussions on raising taxes on high-income earners and the ultra-wealthy are active to secure financial resources. The so-called "taxing the rich" has been included in presidential election pledges as a policy for resolving economic inequality. On the other hand, excessive tax increases raise concerns about weakening corporate activity and capital outflows. In 2024, the digitalization of tax filing systems has accelerated worldwide, making real-time filing, payment, and refunds common, and tax authorities are increasing tax evasion detection rates through AI-based risk analysis.

The emergence of new taxes is also noteworthy. Alongside convenience payment fees imposed on online platform companies, there are moves by local governments to introduce a "platform use tax." Some countries are strengthening environmental taxes that encourage resource circulation, such as waste volume-based fees and compost taxes. In addition, as rising prices have increased the tax burden of automobile tax and property tax, adjustments to tax rates and reform of the tax burden ceiling system are under policy discussion in Korea in 2025.

Tax