Inflation-Indexed Taxation: A Livelihood Measure to Preserve Real Disposable Income and Boost Consumer Spending

Recently, our economy has faced unprecedented inflation as the sustained expansion of liquidity since the COVID pandemic has converged with the global supply chain crisis. According to statistics, over the past 10 years, the Consumer Price Index has surged by about 22.2%, while the Living Necessities Price Index has jumped by 25.6%. In particular, food prices, which are directly tied to the lives of ordinary people, have soared by 34%, eroding households’ real purchasing power.

An even more serious problem is that the government has allowed the phenomenon of “inflation tax” to persist, effectively and legally emptying taxpayers’ pockets by taking advantage of rising prices. This hidden tax hike trap, known as inflation tax, refers to a situation in which taxpayers move into higher tax brackets as nominal income rises with inflation, thereby bearing a greater real tax burden even though tax rates themselves have not been artificially raised.

Looking at changes in Korea’s comprehensive income tax base, the Moon Jae-in administration gradually expanded the top bracket and pursued higher taxes on high-income earners, whereas the Yoon Suk Yeol administration raised the tax base thresholds for the lowest one to two brackets, reflecting inflation only to a limited extent in the tax base. Nevertheless, the current comprehensive income tax system overall still has a fixed tax base and rate structure that is not linked to inflation.

In fact, compared with 2020, average monthly household nominal disposable income in 2025 increased by about 500,000 won (approximately 14%p), but real disposable income over the same period fell by about 75,000 won. Real income has actually declined, yet because of the fixed tax base, people are paying more taxes—a form of “silent plunder.”

For a salaried worker whose annual salary was 64 million won in 2020, if the 2025 Consumer Price Index increase and nominal income growth are each reflected, taxes are estimated to have increased by about 1.2 times and 1.35 times, respectively.

Ultimately, under this stagnant tax base structure, over the past eight years the number of income taxpayers has increased by about 1.8 times, and earned income tax revenue has skyrocketed from 35.1 trillion won to 64.2 trillion won. In other words, without changing the law, the government has collected more taxes from the public by riding the wave of inflation.

There is an urgent need to introduce the globally standard “inflation-indexed tax system.” To correct this structural distortion, which undermines the vitality of the market economy and weakens taxpayers’ predictability, the Center for Free Enterprise (CFE) calls for the immediate introduction of an inflation-indexed tax system.

An “inflation-indexed tax system” is one that automatically adjusts tax brackets and various deduction amounts in line with the inflation rate. Already, 22 out of 38 OECD countries—including the United States (1981), Canada (1973), and France (1969)—have adopted this system to protect taxpayers from inflation.

If an inflation-indexed income tax system is introduced in Korea, an income earner with an annual salary of 64 million won would receive tax relief ranging from about 400,000 won to as much as about 1 million won. This would be the most reliable measure to preserve the real disposable income of salaried workers in an era of high inflation and to reinvigorate consumption.

The inheritance tax also needs reform. The current inheritance tax is an “estate tax” model that taxes the total assets of the deceased, imposing high tax rates regardless of the amount each heir actually receives, thereby raising concerns about fairness and double taxation.

There is a need to lower the top inheritance tax rate and shift to an “inheritance acquisition tax” model that taxes heirs based on the assets they actually receive. Furthermore, the inheritance tax base should also be indexed to inflation so that the nominal rise in asset values does not continue to trigger punitive taxation.

The government should not remain complacent with swollen tax revenues, but should instead restore tax neutrality and protect the public’s real income by introducing an inflation-indexed tax system. Taxes should be based not on punishment, but on fair rules, and at the center of those rules, the reality of changing prices must be properly reflected.

Gwang yong Go, Policy Director, Center for Free Enterprise (CFE)

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Original title: 물가연동세제, 실질 가처분소득 보전하고 소비 활력 불어넣는 민생 대책

Author: Gwang yong Go

Date: 2025-12-30

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28455