Progressive Tax Rates

For someone earning 1 million won a month, a 100,000 won tax bill is heavy enough to mean cutting a month's worth of food spending. For someone earning 10 million won a month, paying 1 million won stings, but it doesn't threaten their next meal. Even at the same 10% tax, the weight each person feels is completely different.

So the government charges lower rates to people with less income and higher rates to people with more. Economists call this the ability-to-pay principle: the more financial room you have, the more you can share for the good of society.

The extra tax collected goes to things like welfare benefits for people in need and public facilities such as roads and hospitals. Wealth flows naturally from better-off groups to less well-off ones, creating a redistribution of income across society.

Compared with taxing everyone at the same flat rate, a progressive rate redistributes more. How the rates should be set, though, is something people hold many different views on.

Among office workers heading into salary talks, you often hear that moving up a tax bracket will leave you worse off. Take a tax table like Korea's, where taxable income up to 50 million won falls in the 15% bracket and anything above that falls in the 24% bracket. If your taxable income rises to 50.1 million won, the worry goes, 24% gets applied to all of it and your pay shrinks.

But real progressive taxes work like a stack of water tanks, with income split into layers. Income up to 50 million won is taxed at 15%, just as before. The 24% rate applies only to the 100,000 won above the line.

Income in the lower brackets you've already passed still gets the lower rate. So moving up a bracket never reaches back and taxes your earlier income at a higher rate.

In the end, when your income rises, you simply pay income tax on part of the extra amount, and a change in bracket never leaves you with less take-home pay. One caveat: when other systems change along with your income, like health insurance premiums or income-tested benefits, you need to look at those separately.

The rates you see in the news or in Korea's income tax table, from 6% up to 45%, are what economists call marginal rates. A marginal rate isn't about all the money you earned. It's the rate on your very last won, the one at the top of your income.

The actual share of your total income that you paid in tax is called the effective rate. Because the lower-taxed income in the earlier brackets props it up from below, your effective rate comes out lower than the marginal rate you see, unless you're in the lowest bracket.

On top of that, tax breaks apply too, such as deductions for dependents, medical expenses, and education costs. So even someone whose top bracket is 24% pays far less than 24% of their total income.

So to really understand progressive taxes, don't be scared off by a complicated rate table. Get in the habit of checking your effective rate, your real tax burden.