[Tax Reform Needed] Rural Special Tax to Hit 18.5 Trillion Won amid Stock Market Boom..."Fencing Must Go, Collection Structure Needs Overhaul"

Revenues from earmarked taxes, such as the Rural Special Tax and Education Tax, are surging due to the bullish stock market and robust performances by financial institutions. However, even though tax collections have increased, the rigid nature of earmarked taxes restricts their usage to specific purposes, resulting in an anomalous situation where trillions of won in unspent funds are accumulating because these resources cannot be flexibly deployed on the ground. Notably, the structure that shifts the tax burden onto stock investors and financial consumers, regardless of any direct connection to rural development or education, is widely seen as violating the fundamental taxation principle of “beneficiary pays.” With the government set to announce tax reform plans, calls are growing to either convert the system of earmarked taxes to general taxes in order to create a more flexible fiscal management structure or to fundamentally overhaul the collection system.

Rural Special Tax Soars Amid Stock Market Boom...Rigid Tax Allocation Swells Unspent Funds

According to the Ministry of Strategy and Finance and the Ministry of Agriculture, Food and Rural Affairs, revenue from the Rural Special Tax is estimated to reach 18.5 trillion won this year. This far exceeds both the original revenue projection in August of last year (8.5 trillion won) and the supplementary budget forecast in March (13.6 trillion won).

The soaring tax revenue is mainly attributable to the booming stock market. The Rural Special Tax—a levy intended to support rural development—derives a significant portion of its funds from share trading. Whenever a KOSPI-listed stock is sold, 0.15% of the transaction value is collected as Rural Special Tax. With the KOSPI index breaking through the 9,000 mark at times this year and trading volumes exploding, revenue projections have been revised sharply upwards. In addition to securities transaction tax revenue, the Rural Special Tax is funded by 10% of acquisition taxes and 20% of comprehensive real estate holding taxes.

The problem is that the surging tax revenue cannot be managed efficiently due to the constraints of earmarked taxes. The Rural Special Tax was introduced in 1994 to offset the impact of the Uruguay Round trade agreements on rural areas, but it remains restricted to supporting rural communities only. About half (52%) of the Rural Special Tax is transferred to the Rural Infrastructure Improvement Special Account and used for projects such as rural social overhead capital (SOC).

This type of categorical "fencing" leads to significant amounts of unspent funds. According to the “2025 Fiscal Year National Settlement Audit Report” published by the Board of Audit and Inspection, out of the 17.37 trillion won Rural Infrastructure Special Account budget, 386.3 billion won (2.2%) was unspent and 58.6 billion won (0.3%) was carried over. The Rural Infrastructure Special Account is funded primarily (52.3%) by the Rural Special Tax and used for direct payments to farmers, research and development, and rural infrastructure (SOC) projects. Despite excess resources, much of the budget remains unused at the local level, resulting in persistent inefficiencies and waste.

Calls Grow to Integrate Earmarked Taxes into General Accounts for Flexibility...President Lee Jaemyung Suggests "Multi-Benefit Use for Rural Basic Income"

To resolve the fiscal rigidity of the Rural Special Tax, some experts argue it should be integrated into general tax accounts (ordinary revenue) to allow for more flexible use. In fact, in 2008, the Lee Myung-bak administration pushed for a plan to abolish the three major earmarked taxes—Rural Special Tax, Education Tax, and Transportation Tax—and merge them into the general account. However, the plan failed to pass the National Assembly and, after multiple extensions, the lifespan of these taxes was raised to 40 years.

With the latest surge in Rural Special Tax revenue, the Lee Jaemyung administration now faces a significant policy dilemma. The Ministry of Strategy and Finance recently hinted at tax expenditure diversification for earmarked taxes while announcing its mid-2026 economic strategy. Kang Kiryong, Vice Minister at the Ministry of Strategy and Finance, stated, “Earmarked taxes have long maintained rigid allocation structures. We are now considering ways to reform tax expenditure in order to address this issue.”

The most likely new use case for the Rural Special Tax is for rural basic income—which provides each resident in rural regions with a 150,000 won local gift certificate every month. President Lee previously said, “With the recent revitalization of the stock market, revenue from the Rural Special Tax has surged by trillions of won. If these resources are used for rural basic income, the benefits will not only invigorate rural communities and prevent local depopulation but also help moderate skyrocketing housing prices in Seoul and surrounding areas—a true multi-benefit solution.”

"It Is Unjust to Collect Rural Development Taxes from Stock Investors...Tax Collection Structure Needs Reform"

However, experts argue that before debating how to spend the Rural Special Tax, the collection structure—now out of sync with the original legislative intent and the “principal beneficiary pays” principle—should be addressed. The government initially allocated a portion of securities transaction tax revenues to fund the Rural Special Tax because, at the time of introduction, the prevailing view was that stock ownership was a luxury reserved for the wealthy. However, stock investment has now become a key financial tool for ordinary citizens. Moreover, since the Rural Special Tax was established to prevent the decline of the rural economy and enhance competitiveness, its financial burden should fall on those who profit from market liberalization. As retail investors do not generally benefit from market opening, the current levy does not meet the beneficiary-pays principle.

Im Dongwon, Director of the Economic Research Center at the Korea Economic Research Institute, stated, “In the past, stock trading was largely limited to the wealthy, but now it is open to the general public. Since ordinary citizens are not beneficiaries of FTAs, the Rural Special Tax on share trading should be reduced or abolished in accordance with sound tax principles.” He continued, “Practically, this is a difficult challenge given the potential for lower tax revenues. Nonetheless, rather than allowing large unspent funds to accumulate, the resources should be diversified with a view toward stable operation, preferably used for rural basic income.”

Education Tax Swells Even as School-Age Population Plummets...Unspent Funds Will Likely Rise Further

Another earmarked tax, the Education Tax, faces similar problems. The Education Tax is levied to expand funding for national education. 20.79% of total domestic tax revenue and a portion of the Education Tax are used as sources of local education grant funds. However, while the school-age population is plummeting, Education Tax revenue continues to rise, resulting in an ever-growing pool of unspent funds.

The Education Tax is charged at 0.5% of the profits earned by banks and securities firms, 15% of the transportation tax, 30% of liquor and automobile individual consumption taxes, and 10-30% of liquor tax. Buoyed by a stock market boom and strong performances from financial institutions, Education Tax collections in 2025 rose 6.5% year-on-year to 5.7229 trillion won, with this year likely to set another record high.

In contrast, the number of school-age children requiring tax-funded services has dropped precipitously due to ongoing low birth rates. The number of pre-elementary, elementary, middle, and high school students fell from 7.558 million in 2015 to 5.936 million last year, and is projected to fall below 3 million by 2034. With the number of students shrinking but tax revenues growing, the carryover and unspent funds held by the 17 regional education offices nationwide increased from 3.8341 trillion won in 2021 to 5.6334 trillion won in 2024. On top of this, the government last year doubled the Education Tax rate on large financial and insurance companies with profits exceeding 1 trillion won from 0.5% to 1.0%, so the amount of unspent funds is expected to rise even further.

"Education Tax Collected from Financial Firms May Be Passed on to Ordinary Citizens...Tax Burden Must Be Reduced"

Consequently, calls to overhaul the distribution structure of Education Tax are intensifying. One proposal is to allocate all Education Tax levied on liquor, individual consumption, etc. directly to universities and early childhood education. Last year, the government amended the tax code to ensure Education Tax collected from financial institution profits is allocated to universities as a priority, with the remainder divided among early childhood, elementary, middle, and high school education.

As with the Rural Special Tax, there are also structural issues with the Education Tax’s compliance with the beneficiary-pays principle. Banks and securities firms have little direct connection to education, so demands for either abolition of the tax or the lowering of tax rates persist. Recently, Choi Eunseok, member of the National Assembly from the People Power Party, sponsored a bill to lower the Education Tax rate from 1% to 0.5% on profits exceeding 1 trillion won. Choi stated, “The creation of a new tax bracket for profits over 1 trillion won and the subsequent surge in revenues could have a direct adverse impact on ordinary people. Financial institutions might attempt to offset higher tax costs by raising lending rates or insurance premiums.”

Demands for adjusting the source of tax revenues also continue. Proposals include reallocating Education Tax to fund financial and insurance education, or using it as a financial market stabilization fund, similar to European financial transaction taxes. Lee Younghan, professor of tax accounting at the University of Seoul, said, “In view of the shrinking education budget due to low birth rates, the best course for ensuring the proper use of earmarked tax revenues would be to abolish the current Education Tax. If this is not feasible due to tax revenue concerns, then expenditure should be redirected to areas more closely related to the financial sector.”

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