Taxes imposed on high-priced luxury goods such as high-end watches and bags increased by 15.6% over two years. Critics also point to fairness issues, such as taxing fur coats costing several million won while not taxing designer clothing priced in the tens of millions of won, and taxing camping cars while not taxing yachts.

According to the Ministry of Economy and Finance’s ‘Status of determined amounts of individual consumption tax by item, 20222024’, released on the 16th by the office of Rep. Chun Ha-ram of the Reform Party on the National Assembly’s Strategy and Finance Committee, the individual consumption tax levied on high-priced luxury goods such as jewelry and designer watches rose 15.6% in two years, from 283.4 billion won in 2022 to 327.8 billion won in 2024.

Last year, the luxury items that yielded the most tax revenue were high-end watches (162.5 billion won), jewelry and precious metals (78.5 billion won), high-end bags (71.6 billion won), high-end furniture (10.0 billion won), and high-end furs (3.3 billion won). Items with larger increases than two years earlier included high-end watches (up 33.3 billion won, 25.8%) and high-end bags (up 12.3 billion won, 20.7%).

The individual consumption tax is levied on purchases of luxury goods, consumption that causes environmental pollution, and entertainment activities. A rate of around 20% is applied to the portion of the price exceeding threshold amounts such as 8 million won for furniture, 5 million won for jewelry, and 2 million won for watches and bags.

The problem is that the taxable scope is overly limited. Under current law, yachts are not subject to the individual consumption tax, but camping cars are subject to a 5% rate. Until 2004, motorboats and yachts were taxed at 20%, but the levy was abolished that year in the name of promoting youth leisure and fostering domestic small and medium-sized enterprises related to yachts. At the time, Rep. Shim Sang-jung of the Democratic Labor Party opposed it, saying, “Because motorboats and the like are hardly produced domestically, there is no effect of supporting SMEs, and it is an anti-people bill that grants preferential treatment to the wealthy,” but the tax law amendment passed.

Another fairness issue arises from taxing fur coats while not taxing ‘luxury apparel’ (high-end clothing) that costs several million won. In a 2014 commissioned research report submitted to the Ministry of Economy and Finance titled ‘Plan to reform the taxable scope of the individual consumption tax’, the Korea Institute of Public Finance pointed out that “to somewhat address the tax equity problem arising from only high-end furs being taxed, it is necessary to expand the taxable scope to high-end clothing.” It proposed including as new taxable items outerwear, suits, and dresses priced over 2 million won.

Some also argue that, because South Korea’s value-added tax rate is lower than that of major countries, there is a greater need to strengthen taxation of luxury goods. Since introducing VAT in 1977, South Korea has maintained a 10% rate. As of last year, this is about half the average of Organisation for Economic Co-operation and Development (OECD) members, at 19.3%. The Korea Institute of Public Finance stated that “although the individual consumption tax is imposed to at least offset the regressivity of the VAT system, its luxury-tax function has been greatly diminished,” adding that “to strengthen the progressivity of the tax system, the luxury-tax function of the individual consumption tax should be reinforced.”

Rep. Chun said, “Because the threshold prices for the individual consumption tax are themselves high, taxation on luxury goods is less effective,” adding, “We should introduce the so-called ‘FLEX tax’ for yachts and high-end clothing as well.”