Government Promises Overhaul of 80 Trillion Won in Tax Expenditures, But Actual Savings Only Around 1 Trillion Won [2026 Tax Reform]

115 Out of 241 Tax Expenditures Targeted for Overhaul
20 Abolished, 64 Redesigned, 17 Converted to Direct Fiscal Support
Experts: "Many Abolitions, But Limited Effectiveness"

The government announced its intention to pursue a "principled abolition" and "comprehensive overhaul" of tax expenditures, which for the first time surpassed 80 trillion won this year. However, more than 80% of these will remain in place next year. While the number of abolitions has increased, major tax exemption and reduction programs—such as the income deduction for credit card use—have instead been redesigned or converted to direct fiscal spending, so the actual amount saved is expected to remain at around 1 trillion won.

Abolition of 20 Programs Including Individual Consumption Tax Cut for Hybrid Cars

According to the “Tax Reform Plan 2026” released by the Ministry of Economy and Finance on August 3, the government designated 115 out of a total of 241 tax expenditures for overhaul. Tax expenditures refer to "indirect subsidies" provided by reducing taxes through income deductions or tax credits, rather than direct government spending. Earlier, Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol had declared, "We will, in principle, abolish those tax expenditures that have persistently continued," signaling a major restructuring campaign.

Of the overhaul targets, 20 programs (17%) are scheduled for complete termination (“abolition”). This is a sharp increase from 7 abolished items last year. The tax expenditures selected for abolition largely focus on programs that have achieved market self-sufficiency or lost policy effectiveness. Notably, the individual consumption tax cut for hybrid vehicles (with a limit of 700,000 won per unit) will expire. The tax break, originally introduced to reduce the upfront cost for early adopters of eco-friendly vehicles, has now achieved its goal, as hybrid cars have become mainstream in the market, so the program will be abolished.

The value-added tax (VAT) refund on accommodation services for foreign tourists will expire in June 2027. This program returned 10% VAT on qualified hotel stays but was found to be ineffective due to low participation rates and a decreasing number of participating hotels. Additionally, the corporate tax credit for increasing wage income—previously offered to firms that raised wages beyond the average increase over the previous three years, allowing them a 10–20% tax deduction on the increase—will end on December 31, 2028, without extension, due to issues of overlap and redundancy with other programs. The documentary stamp tax exemption for loans issued to agricultural and fisheries cooperative members, which reduced the tax by up to 70,000 won per contract, will also be abolished.

64 Programs Re-Designed Instead of Abolished… Large Companies Excluded from Integrated Job Tax Credit

Among the 115 tax expenditures targeted for overhaul, the majority—64 programs (55.7%)—will be "redesigned." This means benefits, eligible recipients, and conditions will be adjusted, but the programs will continue. For example, the integrated employment tax credit—previously offered to companies for every new hire—will be revised to exclude large companies (which had received 3 million to 5 million won per hire) and will now focus solely on small and medium-sized enterprises.

The VAT credit on credit card sales, which has provided a preferential tax credit of up to 1.3% (with a ceiling of 10 million won) on card payment receipts for self-employed individuals (compared to the base 1.0% rate with a 5 million won cap), will now have the preferential rate slightly lowered to 1.2% and the upper credit limit removed, but the program period will be extended for another three years. Jomanhee, Director General for Tax Policy at the Ministry of Economy and Finance, explained, "Although we believe the goal of popularizing the use of credit cards has been achieved, we considered the persistent difficulties faced by self-employed individuals, so we made a moderate adjustment rather than a drastic reduction."

The special flat tax rate for foreign workers (19%) has also been extended until 2029, but the rate will be raised to 21% to increase parity with domestic workers. The tax deduction for preschool education expenses (up to 3 million won per child per year, with a deduction rate of 15%) will be revised to exclude private lessons and academies unrelated to art, music, or sports from eligibility.

Marriage Tax Credit and Public Transit Income Deduction to Shift to Direct Fiscal Support

Seventeen programs (14.8%) will be "converted to direct fiscal spending," with support previously provided via tax breaks now provided through direct expenditure. For example, the individual consumption tax cuts for electric and hydrogen vehicles—previously capped at 3 million won for electric vehicles and 4 million won for hydrogen vehicles—will be gradually reduced and phased out. The subsidy structure will be unified with the government’s direct purchase subsidy, removing duplication between tax and budget incentives. The additional deduction in the credit card income deduction for public transportation use will also be replaced by direct government subsidies, such as the K-Pass program for transit expense reimbursement. Meanwhile, additional deductions for spending on books, performances, museums, and other cultural expenses will be expanded.

The birth/adoption and marriage tax credits—previously allowing up to 700,000 won in tax exemptions for the birth or adoption of a child and 500,000 won for each spouse upon marriage—will be completely overhauled. To address the structural issue of low-income, non-tax-paying households being excluded from benefits and tax reductions favoring high-income earners, the income tax deductions will be abolished and direct subsidies for low-income households introduced in their place.

2.5 Trillion Won Projected Savings... Experts Say Effectiveness Lacking Due to No Major Abolitions Like Credit Card Deductions

The government projects that the latest reforms will reduce tax expenditures by 2.5 trillion won. However, 1.1 trillion won of these reductions come from converting tax breaks into direct fiscal spending. Although this conversion aims to improve efficiency and redistribution, direct fiscal expenditure does not actually reduce the government’s overall fiscal burden. Therefore, the real reduction in tax expenditures from program abolition or redesign only amounts to about 1.4 trillion won—just 1.7% of this year's tax expenditure estimate of 80.5 trillion won.

Experts have pointed out that the reform lacks effectiveness because major tax expenditures with broad social impact were left untouched. Kim Woochul, president of the Korea Association of Public Finance (and professor of taxation at the University of Seoul), commented, "While the sheer number of abolitions is high, major programs such as the credit card income deduction and special small business tax credits—which multiple review panels have recommended abolishing—remain intact, with the focus mainly on less significant items. Since converting tax deductions to direct spending does not generate real fiscal effects, the reforms fall short of delivering the 'landmark overhaul' the government promised." He added, "It is important as a beginning to tax expenditure restructuring, but there is still a long way to go."

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