Four out of every 10 Korean workers and self-employed residents did not pay taxes on their income last year as a result of increased tax credits and reductions, data showed on Monday.

Of the 20.39 million people subject to taxation on their earnings in 2010, 8.39 million, or 41.1 percent, paid no income tax to the government, the National Tax Service said in a report.

The figure marked an increase of 270,000 people who are exempt from income taxes from 2009, raising the issue of whether the Korean government should cut tax credits and reductions to tighten loopholes.

But such moves could raise questions of fairness as the chief victims would be salaried workers whose income is easily scrutinized and subject to taxation, while self-employed high-income earners could continue to evade taxation through various irregular means.

Tax credits based on credit card purchases are a case in point. In recent years, the government slashed tax credits for credit card transactions, which largely affected salaried workers.

According to government data, the tax credit cut for credit card transactions in 2010 will lead to an increase of 1 trillion won in new tax revenue over the next five years. But salaried workers with smaller tax credits are likely to see their disposable income shrink, a development that could undercut the already weakened Korean economy due to external uncertainties.

“The government should be very cautious in reducing tax credits and reductions for ordinary Koreans at a time when consumer prices are going up and pay increases are limited,” said Kim Sun-taek, head of KoreaTax, a civic organization.

Identifying transactions that are out of the taxation cycle is more urgent. The so-called underground economy in Korea, sheltered from government’s supervision, is estimated to account for 20-30 percent of the country’s gross domestic product, valued at some 330 trillion won.

Tax experts called for the government to track down self-employed workers who pay no or a minimum amount of taxes despite sizable income and set up regulatory policies against illegal inheritance practices and wealth transfer to a third country.

By Yang Sung-jin (insight@heraldcorp.com)