Changing Tax Treatment Method and Pension Saving Behavior
Asian Tax Journal Vol. 17 No. 4 (2016), pp. 113-134
Abstract
To improve taxation equity and enhance private pension saving to the middle and low income class, Korean government changed the tax treatment method for the private pension contribution from giving tax redemption to tax credit in 2014. Using statistical yearbook of national tax, we analyze people’s pension saving behavior by income level. Ironically, after changing the tax treatment method, we find that low and middle income groups decreased pension saving and the rich maintain the same pension saving level which is an opposite result from the government’s intention. We explain that for the rich, who have enough money to save, since even though the government reduces the tax favor pension saving is still attractive than other financial products changing tax treatment method does not change their saving behavior. However, after adopting tax credit method for pension contributions, medical expenses, education cost etc, the tax credit cut down on the tax base and many mid and low income people’s standard of assessment become under tax exemption limit that reduces the pension saving incentives. Therefore, we claim that since tax favor reducing pension subscribers’ tax is not enough to enhance pension saving for mid and low income groups we need to consider new pension saving incentive schemes such as matching fund or refundable tax credits. To our knowledge, this is the first research of verifying the relationship between pension saving and changing tax treatment method using population statistics. Additionally this paper also provide a benchmark to access previous research which predicted subscribers’ reaction for the changing tax treatment methods. These are academic contributions of this paper.
Keywords
- tax treatment effect
- tax credit
- private pension
- income level
- pension tax system
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