Separate Taxation on Financial IncomeCase

(11-2 KCCR 593, 98Hun-Ma55, November 25, 1999)

A.Background of the Case

In this case, the Court upheld a provision of the Act on RealName Financial Transactions and Guarantee of Secrecy that imposed a separate tax on financial income.

Supplementary Provision 2 of the above Act repealed an inte-grated financial income tax and instead adopted a separate tax onfinancial income at a rate of 20% increased from the previous 15%.

The complainant owns financial assets in banks and filed a con-stitutional complaint against the above provision, arguing that it in- creased the tax burdens on the low to mid-range income people.

'Integrated taxation on financial income' is the practice of adding interest income, stock earnings, and other incomes arising out of fi-nancial transactions to other incomes, and applying the progressive rateto the total income. Contrary to that, 'separate taxation on fi- nancial income' is the practice of imposing a separate tax on finan- cial income. Financial income is the only type of income taxed sep- arately from other incomes under the current income tax scheme. It is applied a unitary rate.

The legislature had adopted partial integrated taxation for finan-cial income on January 1, 1996 for fairness purposes. When a mar-ried couple's total financial income exceeded forty millionwons, it wasadded to other incomes and applied a progressive rate of 10 to 40%.When it was less than forty millionwons, it was applied a unitary rate of 15%. However, when the Korean economy entered into theIMF relief phase, the legislature decided that the integrated taxation scheme did not help the economy's capacity to overcome the finan- cial crisis, and changed back to a separate taxation scheme on Dec.31, 1997, two years since the adoption of the integrated taxation.The tax rate was increased from the previous 15% to 20%.

B.Summary of the Decision

The Court unanimously upheld Supplementary Provision 2 of theAct that imposed a separate tax on financial income as follows:

We first examine whether separate taxation on financial incomeviolates the principle ofequal taxation. Although equal taxation re-quires taxation based on the taxpayer's ability to pay, it requires thesame income to be taxed equally (horizontal fiscal justice) on onehand, and

demands the tax burden to be fairly shared by people ofdifferent incomes (vertical fiscal justice) on the other.

The principle of paying ability requires simply that the greater incomes be taxed in greater amounts, and that minimum living ex- penses be excluded from taxation. It does not require progressivetaxation. A choice between unitary taxation and progressive taxation is left to the legislature's policy decision. Therefore, the instant pro-vision's unitary system does not violate the principle of paying ability.

On the other hand, the separate taxation system exacts more frompeople in the same income bracket if more of their incomes are fi-nancial incomes. However, the legislature made a policy judgmentfrom the perspective of the national economic goal of overcoming thedire financial crisis under the IMF relief. Since the judgment is not found clearly wrong, we may find that the relative disadvantages tothe taxpayers with greater financial incomes are probably justifiedby a reasonable basis. The provision does not violate equal taxation.

We now review whether the separate taxation of financial incomeviolates the constitutional economic order. Article 119 (2) of the Con-stitution identifies 'appropriate distribution of wealth' as one of theeconomic goals to be achieved by the state. However, it does notprovide for a concrete constitutional duty to impose a progressive tax based on the integrated system. The provision in this case is aimednot only at achieving 'appropriate distribution of wealth' but also ataccommodating the sometimes competing interest of 'balanced growthand stability of national economy.' It arose out of a policy judg-ment in response to the economic circumstances of the time. There-fore, it is not clearly unreasonable and arbitrary, and does not vio-late the constitutional economic order.

Finally, we review whether the separate taxation violates thelow-income people' right to humane livelihood. In principle, incometax is allowed only on the portion of the income that exceeds a min-imum living expense. Such limit is demanded not only by the prin-ciple of social state that the state must guarantee its people the min-imum conditions for humane living, but also by the principle of payingability in which the paying ability arises only from the portion of theincome above the minimum living expense. Although the statute inthis case does not provide for the constitutional exception for a mini-mum living expense, such deduction will be more costly to admin-ister than benefit to the taxpayers while various tax-free savingsaccounts are available in its place. The separate taxation system is effective only for a limited period, anyway. The absence of the ex-ception in the statute therefore has a rational basis and does notinfringe on the low-income people's right to humane livelihood.