On December 31st the National Assembly of Korea voted in a bill to introduce a new income tax bracket and a higher rate of income tax for the country’s highest earning taxpayers. The new tax rate of 38 percent will apply to individuals earning in excess of KRW 300 million annually. Previously, the highest individual income tax rate in Korea was 35 percent. It is currently estimated that the new tax will raise an additional KRW 770 billion in tax revenues per annum.

Approximately only 0.17 percent of the Korean population will have to pay the new tax, and some Korean politicians have already criticized the new rule, saying that it will be ineffective, as it does not target enough Korean taxpayers. Political analysts have suggested that the new tax was instated in order to improve the image of the ruling Grand National Party ahead of the country’s upcoming general election in April. However, representatives of the Party have said that the tax can be optimized in the future, and the applicable rate and payment threshold will be adjusted in order to target more taxpayers.

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On November 6^th Korea’s ruling Grand National Party (GNP) released a statement saying that it is currently conducting research into the feasibility of raising tax obligations for the country’s highest earners.The GNP has not yet revealed what specific taxes it considers to be the most likely, but it was indicated that an increased top marginal rate or an additional high earnings tax were the most realistic options. According to the statement, the GNP is also looking for means to increase taxation on earnings gathered from interest incomes and stocks.

Consideration is being given to raising taxes on enterprises, although the move would likely be restricted to very large family conglomerates.

On the same day the government announced that it is currently investigating potential means of drastically increasing spending on child care and welfare programs for the elderly. In addition the ruling party is weighing up potential tax changes which could serve to stem the country’s growing inflation rate. Local political analysts have said that the new announcement comes as an early launch to the GNP’s re-election campaign for the general election and the presidential elections to be held in 2012. The currently proposed policies are aimed at enticing younger voters, who have largely turned to independent parties over the course of 2011.

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In a statement issued on September 7th the Finance Ministry of South Korea revealed that foreign investors will soon be faced with a new 14 percent tax on all interest incomes earned from foreign currency bonds sold in the country. These financial instruments have come to be commonly referred to as kimchi bonds.

The tax revision will apply to local branches of foreign banks, non-resident corporate investors, and overseas individual investors. It is expected that Japanese banks will be particularly affected by the change, as they currently hold over 75 percent of the country USD 17 billion foreign currency bond market. The proposed tax will be instated in early 2012, if it wins the approval of parliament.

The new measure is expected to help reign in the currently high levels of appreciation of the Korean won. In an earlier effort to control the currency’s growth, the government banned financial companies from purchasing kimchi bonds if the issuer planned to swap the proceeds into won.

According to the Finance Ministry, the proposed tax change will add equality to the tax system, as domestic investors are already charged a similar tax on interests earned from kimchi bonds. The change will be accompanied by the introduction of several other taxation measures on financial derivative products. However, finalization of these tax proposals will be delayed until 2012, when the Finance Ministry can gauge the performance of its currently tabled kimchi bond tax.

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Speaking during a government session at the National Assembly on April 6th, South Korean Prime Minister Kim Hwang-sik explained that the government will run an extensive study on the impact that tax cuts on oil will have on overall tax revenues collection, and the effect that the changes will have on the national energy sector. The government will consider the results and pursue actions based on the findings.

The Prime Minister’s comments came in response to question from the ruling Grand National Party, when it suggested that a tax cut on oil would be a good option for reducing inflation levels, which he claimed would have deeply negative effects for the country’s working class.

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In a speech commemorating the 65th anniversary of Korea’s liberation from Japanese occupation, Lee Myung-bak, President of South Korea, restated that reunification between North and South Korea will definitely come between. However, the process could cost as much as USD 1 000 billion, and fiscal steps need to be taken now to ensure its future economic viability. Lee Myung-bak has proposed that a new “unification tax” be levied to cover the expected costs. The President stated that a panel of experts will soon begin discussions on the nature of the “unification” levy, its rate, and the tax’s balance between the two nations. Political experts predict that the proposal will initially be met with scorn from North Korea, based on previous discussions on unification or regime change.

The tax proposal has re-sparked debate over the potential benefits of unifying North and South Korea. Economic analysts have predicted that the large costs associated with uniting the two countries will be offset by the inherent potential of North Korea’s economy and relatively low wages. However, some other economists are arguing that the single Korean nation concept should be postponed, in favor of turning North Korea into a semi-autonomous investment enclave.

In his speech Lee Myung-bak also outlined his vision for the reunification process. Initially, North Korea would need to dismantle its nuclear arsenal, a step labeled as creating the “peace community”. The President has already offered Pyongyang USD 40 billion in infrastructure aid and economic incentives completion of the disarmament. Next, the two nations should work towards increasing economic ties and integrating their financial systems, creating an “economic community”. Eventually it will be possible for the two countries to unite in a “community of the Korean nation”.

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