Junhah Kim
OECD Economic Surveys: Korea 2026
Abstract
Korea’s tax system has evolved in line with the country’s rapid economic growth and profound social changes over the past half century. Looking ahead, it faces the ongoing challenges of securing tax revenue in the context of rapid ageing, while supporting economic growth. There is scope to boost growth by rebalancing the tax mix away from transaction-based property taxation toward more recurrent property taxes and making more use of indirect and corrective taxes. Reducing tax expenditures and streamlining the number of tax brackets in the corporate and personal income tax would reduce distortions to economic activity.
Korea’s ageing-related spending pressures are mounting rapidly. Even though there is room to improve the fiscal balance by reducing expenditures and implementing structural reforms, increasing revenue will be needed to reduce public deficits in the next few years and achieve long-term fiscal sustainability (Chapter 1). At the same time, Korea must design its tax system to better support economic growth in a low-growth environment, as taxes influence household and business decisions related to labour supply, investment and innovation (Johansson et al., 2008[1]).
As Korea has developed, the tax system has also evolved. This is notably the case of the overall tax take. The tax-to-GDP ratio in Korea rose from 17.9% in 1990 to 20.2% in 2000. In 2024, Korea’s total tax revenue amounted to KRW 645.8 trillion (USD 473.7 billion) or 25.3% of GDP, which is significantly lower than the OECD average of 34.1% (Table 2.1). There is currently a total of 25 different taxes in Korea, consisting of 14 national taxes and 11 province, city and county taxes (Table 2.2). Of the total revenue excluding Social Security Funds (KRW 450.6 trillion), central government tax revenue amounted to KRW 336.5 trillion, representing 74.7% of the total. Province, city and county tax revenue amounted to KRW 114.1 trillion, accounting for the remaining 25.3%. The share of central government tax revenue in total tax revenue has remained broadly stable at around 81% in 1990 and 82% in 2000.
Source: OECD, Revenue Statistics (database).
Note: 1. Individual consumption tax is a central government excise tax levied on selected goods and services. The Local Consumption Tax involves transferring a portion of the value-added tax (VAT) revenue to local governments. Specifically, 74.7% of the VAT amount paid is retained as VAT revenue, while 25.3% is allocated as Local Consumption Tax and transferred to local authorities. 2. A provincial tax on betting turnover from designated gambling-related leisure activities (horse racing, cycle racing, and motorboat racing).
Source: Korean Taxation 2023(Ministry of Finance and Economy)
Looking at the composition of tax revenue, the share of the major distortive taxes in total revenue is higher than the OECD average. As of 2024, the personal income tax (PIT) accounted for 20.1% of total tax revenue, which is lower than the OECD average of 24.1%. The corporate income tax (CIT) accounted for 11.1% in Korea, lower than the OECD average of 11.4% (Figure 2.1). Even though property taxes accounted for 11.7% of total tax revenue in Korea, considerably above the OECD average of 5.1%, a large share stemmed from transaction and taxes rather than more growth-friendly recurrent taxes. The share of value-added tax (VAT) in Korea was 16.8%, which is lower than the OECD average of 20.4%.
As a share of total tax revenue, 2024 or latest
Source: OECD, Revenue Statistics (database).
The structure of taxation also reflects the widespread use of tax expenditures. In 2023, the central government's tax expenditures totalled 276 items, amounting to KRW 69.8 trillion (Table 2.3). This represents 20.1% of total central government tax revenue and 2.9% of GDP, which is somewhat lower than the OECD averages of 21.4% and 4.6%, respectively (Redonda, von Haldenwang and Aliu, 2025[2]). However, a large number of tax expenditures may entail its own costs in terms of complexity and economic distortions. Among these, expenditures related to the PIT accounted for the largest share at 58.6%, followed by the CIT at 17.8% and the VAT at 17.2%. These expenditures narrow the revenue base.
Tax expenditures, 2023
Source: Ministry of Finance and Economy
Key reform directions to boost growth include improving the structure of taxation within each main tax base while shifting taxation away from the more distortive to less distortive ones. A revenue-neutral shift of property taxes towards recurring taxation and moving towards tenure neutrality would increase residential mobility and put renters on a more equal footing to owner-occupiers. Recurrent property taxation could nonetheless tax vacant properties and those used as secondary residences with higher rates than primary residences. For the corporate income tax, moving towards one uniform rate and reducing tax expenditures would help secure the revenues needed in the future. The tax base of the personal income tax can be broadened by reducing tax expenditures and reforming the bracket structure. Approximately 75% of personal income tax expenditures consist of deductions related to social protection, such as old-age income security, welfare spending and essential expenses associated with labour participation. While this may limit the scope for sharp reductions, the share of tax expenditures benefiting high-income individuals—those earning more than 200% of the average wage—has been steadily rising, from 32.5% in 2024 to 34.8% in 2025 and 35.1% in 2026 (MoFE, 2025[3]), suggesting the need for a more rigorous reassessment.
Broadening the tax bases of corporate and personal income taxes would allow increasing the tax take somewhat with limited negative growth effects. However, indirect and corrective taxes are relatively more supportive of growth and welfare. Although consumption taxes lower the purchasing power of real after-tax wages and may have a negative impact on labour supply (Johansson et al., 2008[1]), they generally cause less distortion compared to income taxes. Korea’s VAT rate is, at 10%, about half of the OECD average and the VAT-to-GDP ratio is four percentage points below the OECD average. Increasing VAT revenue while reducing the relative importance of taxes on capital and labour is therefore likely the least distortive way to raise sufficient revenue to meet mounting fiscal pressures from ageing in the years to come.
Taxes can serve additional objectives, as they affect behaviour and the distribution of income. Corrective taxes should be strengthened on their own merit, but can also play an important although limited role in Korea’s efforts to achieve long-term fiscal sustainability. There is notable potential to raise revenues by increasing auctioning to the Emissions Trading System and raising taxes on energy use, tobacco and alcohol. However, the revenue-raising potential is limited by narrow and shrinking tax bases. Reducing income inequality remains an important policy objective, but requires a strategic mix of taxes and transfers rather than expecting every individual tax to serve redistributive goals.
The rest of this chapter discusses the main taxes in more detail and identifies options for reform with a main focus on how to make the structure of each individual tax class more growth friendly.
Korea's corporate income tax is relatively complex, featuring a progressive rate schedule with four tiers, where different rates are applied based on the size of the tax base (taxable income). The local CIT, which amounts to 10% of the national CIT, rate is added on top of the national CIT rates of 10%, 20%, 22%, and 25%. In this progressive tax schedule, taxable income exceeding KRW 20 billion (~USD 17 million) are taxed at rates exceeding the OECD average of 23.7% in 2024 (Table 2.4). Among OECD member countries, 22 apply a single CIT rate, while 12 countries use a two-tier tax structure. Only 4 OECD countries — Korea, Costa Rica, UK and Luxembourg — have adopted a CIT system with three or more tax brackets.
Corporate income tax rate
Source: Corporate Income Tax Law, Local Tax Law (Korea)
CIT-related exemptions and tax credits accounted for 17.8% of the total amount of tax expenditures in 2023 (Table 2.3). The incentives related to investment, R&D, SMEs and employment account for 13.1% of total CIT revenue (Table 2.5). Tax expenditures narrow the tax base and increase distortions and complexity. For example, under the four-tier tax bracket, companies with lower taxable income, usually SMEs, are subject to lower marginal tax rates, and they benefit from a tax reduction of up to 30% in addition to other tax expenditures. These differentiated brackets and tax expenditures related to company size give businesses an incentive to remain small or to split into multiple entities to continue benefiting from the preferential tax treatment (OECD, 2015[4]). Key reform priorities for the corporate income tax are to over time close the gaps between CIT rates, eventually converging to one uniform rate, and broaden the tax base by reducing tax expenditures. The tax system also needs to keep up-to-date with Korea’s commitments under the OECD Base Erosion and Profit Shifting Initiative (Box 2.1).
Tax expenditures in CIT – % of CIT revenue, 2023
Source: Ministry of Finance and Economy
Korea is implementing of the Global Anti-Base Erosion Tax. In December 2022, Korea adopted the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) rules and incorporated them into its domestic law, the Adjustment of International Taxes Act (AITA). The framework, effective from 1 January 2024, mandates a 15% minimum effective tax rate (ETR) for multinational enterprises (MNEs) operating across jurisdictions, countering profit shifting and tax avoidance incentives (NABO, 2026[5]). In 2023-2025, Korea continued to revise its relevant domestic legislation to reflect evolving OECD guidance and to address domestic challenges. The design of tax incentives will require careful reassessment in a post-Pillar Two environment (OECD, 2022[6]). Wherever tax incentives drive an MNE’s effective tax rate (ETR) in a jurisdiction below 15%, the MNE would potentially be subject to Top-up Taxes under the GloBE Rules, a core component of Pillar Two. In January 2026, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting released the Substance-Based Tax Incentive Safe Harbour (SBTI-SH), under which Qualified Tax Incentives (QTIs) linked to real economic activity are recognised in adjusted covered taxes, thereby reducing the resulting top-up tax. (OECD, 2026[7]). Korea will need to systematically review tax incentives to ensure alignment with these rules.
From a tax base perspective, Korea’s personal income tax (PIT) is levied on a narrow tax base, with the tax burden concentrated on high-income earners, alongside a large share of individuals being tax-exempt. In 2024, Korea’s PIT represented 5.1% of GDP and 20.1% of total tax revenue, below the OECD average. As of 2024, 6.84 million out of a total of 21.08 million wage earners (32.5%) were non-taxable (Figure 2.2, Panel A). The exemption rate could be higher when the Earned Income Tax Credit (EITC) is taken into account. This share is higher than in other OECD countries such as Japan (15.1% in 2020), Australia (15.5% in 2018), and the United States (31.5% in 2019). Measured as the tax burden as a percentage of gross wage earnings, the overall tax wedge for a single individual with an average income, including social security contributions (SSC), was only 16.3% in 2024, the fifth lowest among OECD countries (OECD, 2025[8]). Even among those earning more than the median wage, the proportion of tax-exempt workers remains high, at around 27% (Panel B). Moreover, the effective tax rate in 2024 for wage income bracket of KRW 20–40 million, which includes the median income, was only 0.8%, while the effective tax rate for the income bracket of KRW 1 billion or more was 37.4% (NABO, 2026[5]).
Note: The median income of wage earners in December 2024 was 2.88 million KRW (Source: MoDS), which corresponds to 34.56 million KRW annually.
Source: NABO (2026) Tax System of the Republic of Korea 2026.
Korea’s PIT can be divided into global income taxation and schedular income taxation. Under the global income taxation system, all types of income are aggregated and taxed at progressive rates regardless of their sources or categories. Interest-, dividend-, business-, wage-, pension- and other income are subject to global income taxation. Lump-sum retirement income (which does not include pensions received periodically) and capital gains are subject to schedular income taxation, meaning they are taxed separately at distinct rates rather than being combined with other income. This separation is intended to prevent the bunching effect, when income that has accrued over several years is taxed at once under a progressive rate structure, resulting in a higher tax burden compared to a flat tax rate or when income is spread out over multiple years. The rationale is to reach a more neutral tax treatment across the different types of retirement income payments, as lump sums can be quite large and significantly increase the individual’s marginal tax rate in the year of withdrawal (OECD, 2006[9]).
The number of tax brackets for the global income tax expanded from 5 to 8 between 2016 and 2021 (Table 2.6). This is relatively high compared to the OECD average number of PIT brackets, which was four in 2024 (excluding Luxembourg, which has 22 brackets). Having a large number of tax brackets can make it more difficult for taxpayers to understand how the system works and to calculate how much they will actually end up paying in taxes (OECD, 2006[9]). Furthermore, high marginal taxes lower work incentives and increase the incentives for tax avoidance and evasion, which negatively affect revenue, efficiency and fairness of the tax system (OECD, 2006[9]).
Source: Income Tax Law, Local Tax Law (2025)
Despite the highly progressive PIT structure, the overall effect on income distribution is muted. The top statutory rate of the global income tax is set at 45%, but when including the local PIT (levied at 10% of the national PIT), it rises to 49.5% (Table 2.6). The top statutory rate exceeds the OECD average (42.5% in 2022), but only applies to income exceeding 19.0 times the average wage (in 2025) (Figure 2.3). This is a very high multiple compared to the OECD average of 6.4. The minimum national and local statutory tax rate is 6.6%, while only Japan (5%) and Mexico (1.9%) have lower minimum statutory PIT rates than Korea. Raising income taxes on individuals from around the median wage would be a way to raise additional revenue. Such reform should minimise adverse effects on work incentives. Negative distributional effects of such reform, if any, could be mitigated through the transfer system, using a share of the additional revenue.
Against their thresholds, 2025
Note: The figure includes data for all OECD countries except Colombia. Colombia, which is an outlier, has been excluded to improve the readability of the graph. In Colombia, a top PIT rate of 39.0% applies above a threshold of 51.5 times the average wage.
Source: OECD Tax Database.
Generous tax expenditures contribute to Korea’s relatively low PIT revenue and high share of tax-exempt taxpayers. As of 2023, the PIT tax expenditures represent 35.3% of potential PIT revenue, the highest proportion among all types of taxes. Tax expenditures are often extended beyond the date set in their sunset clauses. In 2025, only two PIT-related tax expenditures were abolished, while two new measures - including the schedular taxation of dividend income from high-dividend companies - were introduced, resulting in no net reduction in the number of tax expenditure items (MoFE, 2025[3]).
One of the main tax expenditures is the EITC, introduced in 2008 to incentivise work and reduce income inequality. Since its introduction, both the coverage and eligibility have been gradually expanded. A total of 450 billion KRW was paid to 590,000 households in 2009, averaging 770,000 KRW (528 USD) per household. By 2024, the programme covered 4.1 million households (or 17.8% of them). Total payments amounted to KRW 4.7 trillion (4.0% of PIT revenue), making it the second-largest tax expenditure item, with an average benefit of KRW 1.11 million (USD 760) per household. The most significant increase occurred in 2019, when the system was revised to shorten the phase-in range and broaden the plateau and phase-out ranges, a pattern that has persisted to this day (Table 2.7). However, empirical results showed labour supply increases only in the phase-in range (Kim and Kim, 2020[10]). Optimising EITC design could improve its cost-effectiveness, and any further extension should be backed by solid cost-benefit analyses.
Annual EITC by annual gross income bracket, 2025
Source: Special Tax Treatment Control Law (2025)
Most OECD countries tax capital gains more favourably than other forms of income, but approaches vary (Hourani and Perret, 2025[11]). OECD countries often tax capital gains separately from labour income, most commonly at flat rates (e.g., France, Germany and Japan) or at progressive rates (e.g., the United Kingdom and the United States), which tend to be lower than the rates levied on labour income. Some countries tax capital gains with other personal income but provide relief, such as through partial exemptions (e.g., Canada and Australia). Some countries, such as Korea, effectively do not tax capital gains obtained by individuals from publicly traded stocks. In the case of stock shares traded on the KOSPI market in Korea, capital gains are taxed only for major shareholders who hold at least 1% of a company’s shares or whose holdings exceed KRW 5 billion. To mitigate the problem whereby only a limited portion of capital gains was subject to taxation, the Korean government announced the introduction of a Financial Investment Income Tax in 2020, but the proposal did not pass the National Assembly and was hence not implemented. Despite this setback, ensuring uniform tax treatment of capital gains from different types of capital should remain a priority.
In Korea, consumption taxes are broadly divided into three categories: Value-Added Tax (VAT), Individual Consumption Tax (ICT), which is a type of excise tax, and the Transportation, Energy and Environment Tax (TEET). VAT is a general consumption tax imposed on all goods and services, while the other two apply only to specific goods and services. The TEET is levied primarily on gasoline and diesel used as transportation fuels, while the ICT is imposed on other fuels and coal.
Korea applies a single VAT rate of 10% while adopting exemptions for basic necessities and certain goods and services. Since its introduction in 1977, Korea’s VAT rate has remained at 10%, which is about half of the OECD average of 19.3% in 2024. By further comparison, the OECD average standard VAT rate rose from 15.6% in 1975 to 19.3% in 2024. As a result, Korea’s VAT revenue as a share of GDP is lower than the OECD average (Figure 2.4). In addition, a simplified taxation scheme is in place for small businesses to reduce compliance costs. Taxpayers under the simplified regime, to whom industry-specific value-added rates apply, face a substantially lower tax burden than general taxpayers. The simplified system only accounts for a small share of VAT revenue, but due to an increased turnover threshold in 2024 and the rapid expansion of small-scale e-commerce businesses (MoDS, 2025[12]) the number of simplified taxpayers has been increasing in recent years. Reducing the scope of simplified VAT taxpayers and phasing out exemptions would broaden the VAT tax base while maintaining administrative simplifications for eligible businesses.
Source: OECD, Revenue Statistics (database).
Korea’s relatively low VAT rate is partly offset in terms of revenue by efficient VAT collection. In 2022, Korea’s VAT Revenue Ratio (VRR), the actual VAT revenue collected compared to the revenue that would have been collected if the standard VAT rate had applied to all final consumption, stood at 0.73, exceeding the OECD average of 0.58 (OECD, 2024[13]).
The effective implementation of VAT collection regimes for cross-border digital supplies is also a factor influencing the VRR (OECD, 2024[13]). With the digitalisation of the economy, governments are adapting their VAT systems (OECD, 2025[14]). Since 2015, Korea has imposed VAT on digital services supplied by foreign businesses directly or through foreign online marketplaces to domestic consumers. In this case, the taxpayer is the foreign business or the platform operator, who must register as a simplified taxpayer and pay VAT. The VAT reported by simplified taxpayers under this system amounted to 23.3 billion KRW in 2015 and has increased to approximately 711 billion KRW by 2024. Many countries are increasingly considering further reform to ensure that VAT is also collected effectively on online sales of low-value imported goods (OECD, 2025[14]). Australia, New Zealand and Norway have introduced a vendor collection regime to expand the scope of taxation on low-value imported goods (OECD, 2024[13]), whereas Korea exempts low-value imported goods valued under USD 150 from both VAT and customs duties. The expansion of taxation to low-value imported goods through a vendor collection regime with limited administrative costs would allow for broadening the VAT and the customs duty bases, thereby reducing economic distortions between domestic and imported products, as well as between high-value and low-value items.
The Individual Consumption Tax (ICT) was introduced in 1977 under the name “special consumption tax” to curb the consumption of luxury goods and increase the progressivity of consumption taxes. As national income increased, goods such as electronics and jewellery – initially subject to the tax – became less associated with luxury consumption. Consequently, in 2007, the tax was renamed the “individual consumption tax,” placing stronger emphasis on its role in taxing negative externalities rather than on discouraging the consumption of luxury goods. In 2023, total revenue from the individual consumption tax amounted to KRW 9 trillion, of which coal used for power generation accounted for KRW 2.8 trillion (31%), tobacco KRW 2.1 trillion (23%), petroleum products KRW 1.8 trillion (20%), automobiles KRW 1.7 trillion (18%) and other items KRW 0.5 trillion (7%).
Korea’s tobacco tax, which was previously KRW 1 550 per pack, was raised to KRW 3 318 per pack in 2015, accounting for 73.7% of the retail price. Since then, the tobacco tax has not been increased for nearly ten years. Compared with other OECD countries, South Korea’s retail price level for cigarettes and the tax burden as a share of the retail price both remain relatively low (Figure 2.5). 15.3% of Koreans smoke daily, which is slightly above the OECD average of 14.8% (OECD, 2025[15]). Therefore, there appears to be scope to further increase tobacco taxes in order to reduce smoking and thereby promote public health. Moreover, in recent years, there has been an overwhelming increase in the evidence concerning the positive distributional impact of tobacco taxes (WHO, 2021[16]).
Price and tax burden ratio of a pack of 20 cigarettes in OECD countries, 2022
Source: WHO (2023), Most sold brand of cigarettes: National taxes and retail price for a pack of 20 cigarettes.
Although taxes on alcohol were originally conceived as a means to raise revenues for the public sector, today they are increasingly viewed also as a public health measure (Rice, 2012[17]). Compared to alcohol consumption in other OECD countries, Korea consumes a similar amount: 8.7 litres per capita compared to an OECD average of 8.9 litres. However, aggregate consumption masks harmful alcohol use, including frequent drinking among working-age men and young women, higher rates of binge drinking and alcohol dependence than the OECD average, and the highest per capita alcohol-related road traffic accidents in the OECD (OECD, 2020[18]). The liquor tax in Korea is not differentiated according to alcohol content, as is the case in the United Kingdom or Ireland. Instead, taxes differ by type of alcoholic beverage: takju (traditional rice wine) and beer are taxed based on volume, while whisky, soju, and other spirits are taxed based on their value. Among the various ways to tax alcoholic beverages, taxing in proportion to alcohol content can enhance policy effectiveness by directly targeting the source of the externality—the amount of pure alcohol consumed (Mansour, Petit and Sawadogo, 2023[19]).
Korea applies carbon pricing broadly compared to other countries through fuel excise taxes and the Korea Emissions Trading System (K-ETS). However, the overall price level remains relatively low. In total, 98.5% of GHG emissions in Korea are subject to a positive Net Effective Carbon Rate (ECR) in 2023 (OECD, 2024[20]). Explicit carbon prices in Korea consist of ETS permit prices, which cover 80% of greenhouse gas (GHG) emissions in CO2e. Fuel excise taxes, an implicit form of carbon pricing, covered 55.3% of emissions in 2023. Net average effective carbon rates were EUR 25.95 per tonne of CO2e on average in Korea in 2023. Explicit carbon prices reached an average of EUR 6.46, while fuel excise taxes amount to EUR 19.53 on average (Figure 2.6).
2023
Source: OECD (2024), Pricing Greenhouse Gas Emissions 2024.
K-ETS was launched in 2015 as the region’s first nationwide, mandatory ETS. It was designed to help the country achieve its objective of becoming carbon-neutral by 2050. The “Fourth National Emissions Allowance Allocation Plan”, released at the end of 2025 and covering the period 2026–2030, incorporates several of the recommendations made in the 2024 Economic Survey of Korea (Table 2.8). In particular, the overall emissions cap under the emissions trading system has been aligned with the 2030 emissions reduction target. The total emissions cap for 2026–2030 is set at 2.54 billion tons (an annual average of 510 million tons), of which 2.1 billion tons will be allocated to firms for free (MCEE, 2025[21]). The annual emissions cap is set to decline linearly so that emissions covered by the ETS will reduce emissions proportionally to the pledge to reduce domestic emissions by 40% from 2018 to 2030 (Box 2.2). In addition, banking of emissions allowances has been allowed to some extent. The share of auctioned allowances is also gradually increasing and will reach 50% in the power sector by 2030.
Korea is among the largest greenhouse gas (GHG) emitters in the OECD. Emissions rose fast during a long period of rapid economic development until they peaked in 2018 (Figure 2.7, Panel A). Per capita emissions also increased over the same time period, largely reflecting income growth (Panel B). Emission intensity per unit of GDP has improved but remains high compared to OECD peers (Panel C). Main emitting sectors are electricity generation and manufacturing, reflecting Korea’s heavy dependence on manufacturing exports, including steel and chemicals, and a continued high reliance on coal in electricity production (Panel D), which also contributes to high levels of particle pollution
Note: LULUCF stands for land use, land use change and forestry.
Source: OECD, Air and climate (database); The Presidential Commission on Carbon Neutrality and Green Growth.
Korea has been addressing climate change through the Framework Act on Carbon Neutrality and Green Growth to Respond to the Climate Crisis, which came into force in 2021. The Act sets a long-term objective of achieving carbon neutrality by 2050 and establishes a medium- to long-term greenhouse gas mitigation target of reducing emissions by 40% from 2018 levels by 2030. To operationalise these objectives, Korea prepares and implements a National Carbon Neutrality and Green Growth Basic Plan with a 20-year planning horizon, which is updated every five years. In 2025, Korea submitted its 2035 Nationally Determined Contribution (NDC) of a 53–61% reduction in greenhouse gas emissions compared to 2018 levels to the UNFCCC.
Source: OECD Economic Surveys: Korea 2024 (updated).
Despite this progress, there remains scope for further improvements to strengthen Korea’s carbon mitigation efforts and enhance the efficiency of the emissions trading system, notably by increasing auctioning further. In addition, despite its broad coverage, the price under the K-ETS is relatively low at 18 USD/Mt CO2-eq in 2024 compared to 87 USD/Mt CO2-eq in the EU ETS. The market also lacks liquidity, with limited participation, lower trading volumes and fewer financial instruments (IEA, 2025[22]). Under the new plan, around 90% of allowances will still be allocated for free, largely reflecting concerns about export competitiveness in the industrial sector. In particular, in energy-intensive and trade-exposed industries such as steel, refining, petrochemicals and semiconductors, 95% of subsectors with a high export share will continue to receive 100% free allocations. For the remaining 5% of industrial subsectors, the auctioning share will increase only modestly, from the current 10% to 15%. Carbon leakage from pricing instruments is generally limited. Hemmerlé, Kruse and Pisu (2025[23]) find an average leakage rate of 3%, which means that for every 100 tonnes of emissions that are reduced domestically from a unilateral tightening of climate policies, imported emissions rise by around 3 tonnes. Leakage rates were not found to be particularly high in Korea compared to other countries. Sectors with the highest level of carbon leakage vulnerability, such as basic metals, other non-metallic mineral products (including cement), and chemicals and pharmaceutical products, were found to have leakage rates ranging from 17 to 28%, although with large cross-country variation. Even for these sectors, the paper argues that stringent climate policies are compatible with preserving the competitiveness of companies if a well-designed policy mix of market-based, non-market-based, and technology support is applied. Auctioning a higher share of allowances should be feasible, and could give an important revenue boost while improving the market functioning of Korea’s emissions trading system.
Like most OECD countries, Korea taxes transport fuels more heavily than heating and process fuels and electricity (OECD, 2013[24]). Overall, taxes levied on transport fuels raise at least 70% of the revenue from energy taxation owing to the much higher rates at which they are taxed compared to other energy products. The basic TEET rates are set at 475 KRW per litre for gasoline and 340 KRW per litre for diesel, but the government may flexibly adjust these rates by up to ±30% depending on supply and demand conditions for each fuel. The TEET has been applied at levels below the statutory rates since November 2021, when a fuel tax cut was put in place as a temporary crisis response measure. It has been scaled back over time, but was never fully reversed as originally intended. The tax cut was recently sharpened in response to the Middle East crisis. Korea has put extensive policies in place to improve energy efficiency, but such policies would be much more effective if end-users faced the true cost of energy use. Having a clear strategy to fully phase out the temporary fuel tax cut as energy markets stabilise would be one step in this direction, but this issue extends beyond the tax system, notably to electricity market regulations (OECD, 2024[25]).
The bulk of the transport fuel tax revenue comes from the Transportation, Energy and Environment Tax (TEET) on gasoline and diesel; the rest comes from two taxes applied on top of the TEET, the education tax (15% of TEET) and the local motor fuel tax (26% of TEET). Energy used for heating and processes is predominantly taxed through the Individual Consumption Tax (ICT), which is levied at a fixed rate per unit of fuel. With electric vehicles accounting for an increasing share of road transport, revenues from these taxes will fall. In 2023, governments worldwide faced revenue losses of about EUR 13 billion due to reduced oil consumption from the increased penetration of electric cars. Revenue losses could reach EUR 76 billion by 2030 (OECD, 2024[20]). In response, jurisdictions have begun phasing down subsidies and preferential tax treatment for electric vehicles and are adopting distance-based road charges.
The education tax is a surtax levied on a range of tax bases, including TEET, ICT and consumption taxes, earmarked for funding primary and secondary education. In the cases of ICT and TEET, the Education Tax is levied as an additional 15% of the tax amount. Just under 2% of tax revenues from the central government are earmarked for this purpose and 3.6-10% of local tax revenues. Earmarking in general prevents tax revenue from being used optimally. In this case, student numbers are falling rapidly while funding in real terms tends to rise as the economy expands. Primary and secondary education is well-funded, while tertiary education has low funding per pupil compared to the OECD average. The formal earmarking of tax revenue for educational purposes should be gradually reduced. This would incentivise shrinking the education sector in proportion to declining cohorts while allowing a reallocation of resources, notably from primary and secondary education to tertiary education (Chapter 3). The allocation structure of the Education Tax was restructured in 2025 to expand financing for higher education. This is a step in the right direction, although the inherent limitations associated with earmarked taxes continue to apply.
Various taxes are imposed at different stages of home ownership in Korea. At the acquisition stage, the acquisition tax (a provincial tax) is levied. During the holding stage, both the comprehensive real estate holding tax (CREHT, a national tax) and the property tax (a city and county tax) are imposed. When sold, income tax is levied on capital gains. In total, property-related taxes are high in Korea, at 3.0% of GDP in 2024 compared with an OECD average of 1.6%. In 2024, the share of property taxes in total tax revenue stood at 11.7%, more than twice the OECD average of 5.1%. In OECD countries, recurrent taxes on immovable property account for approximately 56% of total property tax revenues. In contrast, they make up only 29.4% in Korea, while taxes on property transactions represent 50.4% of total property tax revenues (Figure 2.8).
Property tax revenue as a share of total tax revenues, 2024 or latest
Source: OECD, Revenue Statistics (database).
A common feature across all these taxes is that, even for homes of identical value, they impose a lower tax burden on single-home owners than owners of multiple homes, with some taxes applying higher rates as the number of homes owned increases. For example, when an individual acquires a house, an acquisition tax of 1–3% is imposed depending on the taxable base, which is determined by the actual acquisition price. In the case of multiple-home owners, higher rates are imposed — 8% for households owning three (or two in designated adjustment areas) homes and 12% for those owning four (or three in designated adjustment areas) or more. This approach is intended to curb speculative demand for housing and make it easier for households without a home to purchase one. However, high taxes on multiple-home owners may lead to a combination of higher rents and a reduction in the supply of rental housing (OECD, 2022[26]). To counteract this, additional acquisition taxation based on the number of homes owned is eased for multiple-home owners who register as rental business operators and meet certain conditions, such as limits on rent increases, to ensure that the acquired properties are made available to households without a home at affordable rents. This could also be complemented by government efforts to expand public rental housing supply and implement targeted affordability programmes.
Both the property tax and the CREHT are recurrent taxes on real estate ownership, and the government annually assesses the official property value (69.0% of the market value for apartment units; 53.6% of the market value for detached houses) to determine the tax base. The property tax serves as a local tax to finance local governments, ranging from 0.05% to 0.4%. The CREHT applies much higher and progressive rates with the aim of enhancing tax fairness across property owners and contributing to housing market stability. For individuals, the tax rates (0.5%-5.0%) are applied progressively according to the taxable value brackets and the number of housing units owned (Table 2.9).
Note: The tax base is calculated by applying the fair market value ratio (60%) to the portion of the aggregated officially assessed value of owned housing that exceeds the taxable threshold (KRW 900 million, but for single-household single-home owners, it is KRW 1.2 billion).
Source: Comprehensive Real Estate Holding Tax Law (2025)
Recurrent taxes on immovable property are considered one of the most economically efficient forms of taxation (OECD, 2022[26]), as they have less impact on labour supply, production, investment and innovation (Johansson et al., 2008[1]). In line with OECD recommendations (OECD, 2024[27]), a revenue-neutral shift, by reducing the share of transaction-based taxes within property taxes and increasing the share of recurrent taxes, would support residential mobility, improve labour market efficiency, and mitigate housing market frictions. Such a reform would contribute to a more efficient and resilient housing market. Simplifying the acquisition tax schedule, ideally by adopting a single proportional rate based on property value, would improve transparency and lower administrative burdens. Recurrent property taxation could differentiate between dwellings used as a primary residence and those that are vacant or used as secondary residences, with higher rates on the latter promoting a more efficient use of the housing stock (OECD, 2024[27]). Relying more on recurrent property taxation would create room to eliminate distinctions based on the number of homes owned and limit regional differentiation, further enhancing tenure neutrality in the future. Given the specific features of Korea’s housing market, this would require careful planning. As ownership of additional homes is highly concentrated at the top of the income and wealth distributions, imposing higher recurrent property tax rates on non-primary residences could enhance progressivity.
Capital gains tax is subject to schedular taxation (see above), but the tax rates follow the same rate brackets as the (global) personal income tax. When a multi-homeowner sells a property in a regulated area, a surtax is added to the basic capital gains tax rate: 20% for owners of two homes, and 30% for those with three or more. As is the case in most OECD countries (OECD, 2022[26]), Korea exempts owner-occupied housing from capital gains taxation. Under the one-household, one-home regime, capital gains are fully exempt for properties held for at least two years up to a threshold of KRW 1.2 billion. In practice, eligibility for this exemption is often conditional on actual occupancy, particularly for properties located in designated regulated areas, so that the relief primarily applies to owner-occupied housing. For higher-value properties, where the exemption is only partial, taxable gains are further reduced through a long-term holding deduction that increases with both the duration of ownership and the period of residence, reaching up to 80% for long-held primary residences.
While these provisions are meant to support homeownership, the effectiveness of capital gains tax exemptions in promoting homeownership is uncertain (Millar-Powell et al., 2022[28]). They do not address the main barriers to homeownership (e.g. down-payments, wealth and income constraints) and the benefits of the exemption only materialise when the home is sold. Against this backdrop, the cap on the capital gains tax exemption is in line with OECD recommendations as it strengthens tax progressivity and helps curb upward pressure on house prices, while shielding the majority of households from taxation and avoiding lock-in effects (OECD, 2022[26]).
Alongside housing taxation, one notable feature of Korea’s property tax system is its inheritance tax, which is among the highest in the OECD in both tax rates and the overall tax burden. The tax rates range from 10% to 50%, with the top rate of 50% applying to taxable estates exceeding KRW 3 billion. In 2024, inheritance and gift taxes accounted for 2.4% of total tax revenue (Figure 2.9. ) and approximately 0.6% of GDP, making them the highest in the OECD. This reflects Korea’s high inheritance tax rates and its relatively broad tax base. Limited exemptions exist for the main residence, family-owned businesses and agricultural land, while most other assets are fully taxed (OECD, 2021[29]).
2024 or latest
Source: OECD, Revenue Statistics (database).
Taxing inheritance is, in general, an efficient form of taxation, with evidence suggesting that heirs tend not to be as skilled as their parents in running family businesses (Bennedsen et al., 2007[30]), and it serves the important purpose of reducing intergenerational persistence of economic power. Even so, high inheritance tax burdens may discourage entrepreneurship and complicate family business succession due to liquidity constraints for heirs, particularly for SMEs (Burman, Mcclelland and Lu, 2018[31]). To address this, Korea has continuously expanded business succession deductions, currently allowing tax relief of up to KRW 60 billion if employment and business continuity conditions are met. As the scale of deductions has expanded over time, concerns have emerged that the system is used for tax avoidance. The current business succession deduction system should be reviewed and modified to mitigate the risk of being used to avoid inheritance tax. The inheritance tax is also often raised by business owners as a cause of relatively low equity valuations in Korea (the “Korea discount”). Owner families will have incentives to channel profits to companies in which they hold a higher ownership share ("tunnelling”), regardless of the inheritance tax, although this tax may increase incentives for such behaviour. Reforms to improve governance and protect minority shareholder rights, notably recent and planned amendments to the Commercial Law, seem to be more important and likely were a key factor behind Korean equities outperforming others in 2025 (OECD, 2024[25]) (Chapter 1).
Most OECD countries levy inheritance taxes on the recipients of wealth transfers. In contrast, Korea applies an estate tax on the deceased person’s total net wealth. A recipient-based inheritance tax may be more equitable (OECD, 2021[29]) because the amount of wealth received by each beneficiary and their personal circumstances matter more for equality of opportunity than the total wealth left by the donor. Therefore, a policy to shift the inheritance tax system from an estate tax to an inheritance tax should be considered.
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