Tax systems and tax administrations are the basic framework of economic systems to seek national economic prosperity. Facing unlimited competition with the intensifying tendency toward information, globalization and aging population, the movement of technology, capital and human resources transcends time and space, Korea, as a small open economy, is in urgent need of establishing efficient systems and administration for taxation to make a great leap toward a whole new economy.

The current motley system of taxation has long been unfit for Korea. As securing capital, high-quality brains, and high-end technology is pivotal in today’s international competition, implementing the current tax policies being swayed by the cause of equity or domestic politics can prevent Korea from joining the ranks of advanced countries right before the threshold.

This report argues for the fundamental reform of Korean tax system and tax administration. Fundamental changes have to take place in the public awareness and the leaders’ philosophy toward the tax system. A tax system should be simple and clear.

one of the top prerequisites for the Korean economy’s making a new leap is breaking away from the custom of only addressing symptoms as exemplified in reducing the tax burden on salaried workers, expanding fiscal spending for low-income bracket households, lowering petroleum taxes in response to high oil prices, and using excessive amount of tax collected for implementing revised supplementary spending to boost domestic demand, and pushing through fundamental reform in the tax system.

Despite numerous discussions so far, there has been no single proper reform proposal for the tax system in Korea. The basic reason behind this is the concern for lack of tax revenues, which calls for making an about-turn. Along with 20~30 trillion won in the national treasury, the reform in tax system should be implemented.

Korea’s tax system is really complicated with a total of 30 tax items, 14 for national taxes and 16 for local taxes, respectively. Numerous tax items indicate complexity in the system and increasing difficulty for tax payers’ understanding raises the costs of paying and collecting taxes. The 30 tax items should be reduced to around 10.

For every country, the centerpiece of tax reform lies in the  income tax system, which is crying out for fundamental reform. The introduction of dual flat rate income tax, combination of flat rate income tax and dual income tax, has to be considered.

Among the current 30 tax items, corporate income tax has the biggest problem in terms of equity and efficiency, so it should be abolished and integrated into personal income tax. Abolishing corporate income tax does not make the corporate income nontaxable. When corporate income tax is replaced by personal income tax, the amount of tax revenue does not decrease at all while greater equity in burden of taxation is achieved.

Imposing inheritance tax leads to losses in efficiency, economic vitality, and growth potential, so it is recommended to abolish inheritance tax and to make capital gains subject to taxation instead. Under the assumption that securities transaction tax is removed and deducting capital loss from transfer is allowed, capital gain accruing from transfer of securities should be fully taxed.

The right direction in taxation is gradually strengthening taxation on asset holdings such as comprehensive real estate tax, general property tax in the long term, while taxation on asset transactions like capital gains tax, acquisition tax, and registration tax should be substantially reduced as soon as possible. The focus of tax audit related to real estate should shift from speculation which is obscure in concept into tax evasion.

It is advisable to reinforce taxation on consumption of goods or services. If raising taxes is inevitable due to demand for more revenue, considering increase in the rate of value-added tax can be encouraged. As liquor, tobaccos, and oil products cause negative externality, taxation on them can increase efficiency accompanied by so called double dividend. Therefore, taxation on them should be strengthened.

More emphasis should be made on the role of local taxes. Discovering new sources that have not been subject to taxation is necessary to make them items of local tax, and national taxes with low regional concentration like income tax are subject to the introduction of joint tax system sharing common sources of taxation between the central and local governments. The existing flexible tax rate system should be put to active use while taxation methods for three taxes, automobile tax, tobacco consumption tax, office tax, should be changed from unit tax to ad valorem tax.

It is of vital importance to create a unified collection system so called “National Revenue Service” that would be responsible for both local and national tax administration as well as collection of four major social insurance: national pension, health insurance, employment insurance, and industrial accident insurance.

The committee for tax system reform is in great need of establishment. Higher status than the current Council for Development of Tax System should be given to directly report to president with longer period for activities and completely guaranteed independence.

The tax administration must be on the right track where tax payers are guided to properly pay their designated taxes according to due procedures and details determined by law, and at the same time, a range of stern sanctions are applied to those who neglect to pay taxes.