OECD: "Korea Should Lower Transaction Taxes and Raise Holding Taxes... Semiconductor Supercycle to Continue" (Comprehensive Report 2)

OECD Releases Korea Economic Report on July 2
Medium-Term Fiscal Targets Needed to Address Aging
Recommendation to Raise University Tuition and Reduce Local Education Grants
Performance-Based Wage Reform Proposed to Address Dual Labor Market

With the Lee Jaemyung administration preparing for real estate tax reform, the Organisation for Economic Co-operation and Development (OECD) has recommended that Korea shift its real estate taxation system from a transaction tax-based model to one centered on holding taxes. In addition, to address fiscal risks stemming from low birth rates and an aging population, the OECD suggested raising the pension eligibility age. It also advised relaxing employment protection for regular workers to improve the dual structure of the labor market, and transitioning to a performance-based wage system.

On July 2 (local time), the OECD released its "OECD Economic Surveys: Korea 2026," which outlines these recommendations. Every two years, the OECD reviews the economic trends of its member countries and publishes country-specific reports that include policy analysis and recommendations.

On the 30th, an apartment complex near Dongtan Station in Hwaseong City, Gyeonggi Province. On this day, the Ministry of Land, Infrastructure and Transport announced the designation of Dongtan District in Hwaseong City, Giheung District in Yongin City, and Guri City as new regulated areas (adjustment target areas and speculative overheating districts). Photo by Yonhap News Agency

"Korea's Share of Holding Taxes Is Half the OECD Average... Corporate Tax Rate Should Be Unified"

In the area of tax reform, the OECD criticized Korea's real estate taxation structure. Although Korea's total real estate tax revenue is high compared to other OECD nations, the proportion of holding taxes—which cause less economic distortion—is excessively low. In fact, holding taxes account for only 29.4% of Korea's real estate tax revenue, about half of the OECD average of 56%. The OECD explained, "A revenue-neutral shift that reduces the proportion of transaction taxes and increases that of holding taxes will support residential mobility, improve labor market efficiency, and ease frictions in the housing market." The OECD also noted that increasing the holding tax rate on non-owner-occupied homes would enhance tax progressivity. However, it added that any expansion of holding taxes should be carefully designed, taking into account the unique characteristics of Korea's housing market. "Such reforms will contribute to a more efficient and resilient housing market," the OECD emphasized.

The OECD also called for unifying the current four-tier progressive corporate tax structure into a single corporate tax rate and reducing various tax expenditures (credits and exemptions). It recommended broadening the income tax base by reducing the proportion of tax-exempt workers, who account for 32.5% of the workforce, and, over the long term, pursuing uniform taxation of various types of capital gains, including stocks. The OECD further pointed out that Korea's retail cigarette prices and tax burden remain low compared to major countries, recommending an increase in tobacco taxes. In addition, it suggested addressing loopholes that allow the business succession system to be used for inheritance tax avoidance, and expanding the share of paid allocation through auctions in the greenhouse gas emissions trading scheme.

Direct Hit from Low Birth Rates and Aging... Pension Eligibility Age Should Be Raised by 2035

The OECD warned that Korea must urgently pursue medium-term fiscal consolidation to address its chronic low birth rate and aging population. It recommended establishing medium-term fiscal targets consistent with the long-term sustainability of national finances and taking bold measures to restructure government spending.

In particular, the OECD advised raising the pension eligibility age in stages by 2035, linking it to the age at which people contribute to the national pension. After that, the eligibility and contribution ages should be further linked to increases in life expectancy. The OECD analyzed that a comprehensive pension reform that delays the starting age to 68 by 2035 and then further adjusts it by two-thirds of the increase in life expectancy would boost Korea's GDP by 1.9% in 2060 compared to a scenario without reform. Although recent pension reforms, such as raising the contribution rate from 9% to 13% of income, have pushed back the depletion point of the National Pension Fund to the mid-2060s (7 to 8 years later than previously projected), the OECD stressed that ongoing efforts are still needed.

The OECD also noted that any use of excess tax revenue must consider the implications of an aging society. Douglas Sutherland, Head of the Country Analysis Unit at the OECD Economics Department, stated, "Given the aging population, it is appropriate to use excess tax revenue to promote growth or pay down debt. It can also be used to strengthen education and training, allowing Korea to maintain its high-growth trajectory."

As the contribution of labor to national growth declines, the OECD suggested the need for a comprehensive overhaul of the entire education system. "Although competition for university admissions has intensified, including intensive tutoring, there is insufficient emphasis on critical thinking and self-directed learning skills, leading to continued challenges in youth employment," the OECD diagnosed.

Accordingly, the OECD proposed allowing increases in university tuition fees to enhance competitiveness, while gradually reducing the proportion of local education grants for elementary and secondary schools (local education finance grants), which are currently automatically allocated at 20.79% of total national taxes despite a sharp drop in the school-age population. Ongoing controversy surrounds this grant system as national tax revenue has increased recently, spurred by a boom in the semiconductor industry.

"Relax Employment Protection for Regular Workers and Abolish Seniority-Based Pay"

Regarding labor market structural reform, the OECD presented measures to address the dual structure (the gap between regular and non-regular workers). It recommended relaxing the excessive employment protection for regular workers and expanding enrollment in social insurance. In particular, it noted that the current seniority-based wage system encourages early retirement and hinders companies from investing in employee training. The OECD called for reforming the wage system so that pay is linked to job characteristics and performance. It also recommended abolishing company-specific mandatory retirement ages and gradually raising the statutory retirement age.

Meanwhile, the OECD assessed that Korea's economy is recovering despite domestic and international challenges such as the recent martial law situation and the war in the Middle East. On this basis, the OECD forecasted Korea's economic growth rate at 2.6% and inflation at 2.6% for 2026. "Consumer sentiment, which had been dampened by martial law in 2025, has recovered thanks to expansionary fiscal policy," the OECD explained. "In particular, consumption coupons contributed significantly to the recovery of consumption and small businesses." The report went on to say, "Although the recovery was underway in early 2026 due to robust exports, including semiconductors, the outbreak of war in the Middle East posed new challenges. Nevertheless, prompt crisis response measures are expected to mitigate the negative impact."

However, the OECD recommended that price ceilings and fuel tax reductions—since they entail fiscal costs—should be phased out gradually. It emphasized that, in the event of a prolonged energy crisis, support should be prioritized for vulnerable households and viable businesses. A government official stated, "We plan to carefully review the policy recommendations proposed by the OECD and actively refer to them in future structural reform policies, including real estate tax reform, pensions, labor, and education."

Regarding predictions that the semiconductor supercycle will soon end, Jon Fareliuson, Korea-Sweden Desk Officer for Korea's Economy, said, "I think that is premature. I believe Korea will continue to achieve strong growth."

This content was produced with the assistance of AI translation services.