By Kim Jae-kyoung
Staff Reporter

As many as 1 million of Korea’s working, low-income individuals are expected to receive government subsidies in the form of an income tax aid package in 2008.

The Ministry of Finance and Economy (MOFE) is considering the adoption of the earned income tax credit (EITC), a refundable tax credit for low-income workers outside the social safety net.

The EITC scheme is designed to offset the payroll and income tax burdens of the working poor through tax benefits and to motivate them to keep working by providing an incentive to work.

Under the scheme, low-wage workers exempted from income taxes will get a certain amount of the refundable tax credit from the government. For those having to pay income taxes, when the tax credit exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

For example, if a salaried worker pays 200,000 won ($192) in income taxes a year, and is entitled to a tax credit of 1 million won, the worker will be able to receive the difference, or 800,000 won, in tax refunds from the government under the new tax benefit system.

The EITC is received as a refund from the government and the amount of the EITC will vary according to a family’s earnings and the number of children.

The government’s consideration of the EITC in 2008 is based on the results of a joint study by the Korea Institute of Public Finance (KIPF) and Korea Institute for Health and Social Affairs of the effectiveness of the new system in the country.

According to a report based on the joint study, it will take at least two years to introduce the EITC to wage earners because the new scheme needs an upgraded taxation infrastructure to accurately assess real income of households and individuals.

Therefore, the government is expected to adopt the EITC from 2008, under which wage earners having children and earning less than around 150 percent of the monthly minimum living cost set at 1.13 million won will take advantage of the financial aid system.

It is estimated that if the government applies the system to those earning less than 150 percent of the minimum living cost, as many as 1 million Korean wage-earning households will be able to benefit from the new system.

The report suggests that the government expand the EITC to small independent business owners whose incomes are difficult to be assessed around three years after the system is firstly introduced to wage earners.

``To introduce the EITC, it is essential to upgrade a taxation infrastructure to accurately assess real income of individuals and households,’’ KIPF official Kim Jae-jin said.

``Given the current system, it is impossible to apply the EITC to all households at the same time,’’ he added. ``Since it is difficult to assess the earnings of those with low incomes under the current system, it is desirable to implement the system step by step.’’

The report pointed out that currently, the tax authority has the income records of only 74 percent of wage earners’ income and 29-49 percent of small independent business owners.

The introduction of the EITC is the main part of the MOFE’s long-term tax reform plan pursuing an income-based equable taxation system, which was introduced in March.

The EITC was first implemented in the United States in 1975, and many advanced nations, including Britain, Australia and New Zealand, have adopted the system for the working poor since then.

kjk@koreatimes.co.kr