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Tax Reform in Korea
Region: Asia
Location: Korea, South
Published May 25, 2011
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The tax burden in Korea—at 26 percent of gross domestic product (GDP) —was well below the average of the member countries of the Organization for Economic Cooperation and Development (OECD) in 2006, reflecting Korea’s low level of government spending for pensions, health care, and social welfare. In fact, public social spending amounts to only 7 percent of GDP, far below the OECD average of 21 percent. The low level of social spending is explained primarily by Korea’s relatively young population; the elderly dependency ratio in Korea is the third lowest among OECD countries. Population aging in Korea, however, is expected to be the most rapid in the OECD area, making the elderly dependency ratio the fourth highest by 2050. Korea already has an extensive social security system in place with the introduction of insurance for medical care in 1977, pensions in 1988, unemployment in 1995, and long-term nursing care in 2008. Demographic forces will thus sharply increase government social outlays. Rising government spending will require increased government tax revenue. The challenge will be to boost tax revenue in a way that limits any negative impact on economic growth while also addressing rising income inequality and relative poverty. This paper will first address the challenges making tax reform a priority and then provide a short overview of the Korean tax system.

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