Tax breaks hit record W76.1tr last year, set to climb further in 2026

Tax exemptions, deductions and credits reduced national tax revenue by a record 76.1 trillion won ($54.7 billion) last year, up more than 5 trillion won from the previous year. The national tax reduction rate also exceeded the statutory ceiling for the third consecutive year since 2023, surpassing the legal limit by 0.4 percentage points.

This year, the total tax reduction is projected to surpass 80.5 trillion won, setting yet another record.

The Ministry of Economy and Finance said Friday it submitted a "tax expenditure settlement report" to the National Assembly on Tuesday — the first time such a document has been compiled under a revised law on special tax treatment restrictions.

The report includes data on the total amount and rate of national tax reductions, along with an analysis of how major income-tax expenditures are distributed across income brackets — also conducted for the first time.

Last year's national tax reduction reached 76.11 trillion won, up 5.59 trillion won from 70.52 trillion won in 2024. The increase was driven by growth in tax credits for research and development personnel, integrated investment and integrated employment.

The national tax reduction rate came in at 15.9%, slightly below the initially projected 16.0% but still 0.4 percentage points above the statutory ceiling of 15.5%. As a result, the rate has exceeded the legal limit for three consecutive years since 2023. The statutory ceiling is calculated by adding 0.5 percentage points to the average national tax reduction rate over the preceding three years.

The largest single item of tax relief last year was the special income and tax deduction for insurance premiums, at 7.25 trillion won. It was followed by the pension insurance premium deduction at 4.76 trillion won, the earned income tax credit at 4.64 trillion won, the income deduction for credit card spending at 4.32 trillion won, and the integrated employment tax credit at 4.3 trillion won. The top 20 items combined for 57.93 trillion won in tax reductions, accounting for 76.1% of total tax expenditures.

This year's national tax reduction is projected at 80.53 trillion won, an increase of 4.42 trillion won from last year. Total national tax revenue — including local consumption tax — is expected to reach 419.57 trillion won.

The national tax reduction rate for this year is forecast at 16.1%, which would be 0.3 percentage points below the statutory ceiling of 16.4%. The projection is based on the 2026 tax expenditure budget report prepared in September last year.

The government analyzed the distribution of tax benefits across income brackets for 11 income-tax expenditure programs, taking into account the potential link between income levels and tax expenditures as well as the scale of those expenditures.

A combined analysis of general income earners and wage earners found that higher-income groups received a greater share of both major tax expenditures and final tax liability. In particular, the top income bracket's share of final tax liability exceeded its share of tax expenditures.

The top income decile accounted for 34.7% of total major tax expenditures. Its share of final tax liability reached 77.6%. By item, the top decile's share was highest for pension account deductions at 52.1%, insurance premium deductions at 51.5% and education expense deductions at 50.4%.

By contrast, the earned income tax credit and the income tax reduction for employees at small and medium-sized enterprises were concentrated primarily among those in the seventh income decile and below.