North Korea claims to be the first country in the world to have abolished taxation on individuals and households. This is no longer true, but back in 1974, when the Supreme People’s Assembly (SPA) abolished income tax, it certainly was.
Yet, in a command economy like North Korea, where pretty much all goods and services were rationed, this statement is rather misleading – taxes were only abolished when the state had control over everything money could buy anyway. The story, however, does not begin in 1974, it begins far back in the past in the late 1940s.
Back in the late 1940s, North Korea was still a mixed economy. As even their own domestic propaganda makes clear, North Korea had markets and merchants, as well as nationalized factories. Thanks to the land reform of March 1946 (that the Soviet occupation government instituted), it also had a large class of peasants who were no longer the tenants of landlords.
The state handed the long-suffering peasantry tillage rights, for free: scoring a major victory in the inter-Korean propaganda war (prior to the actual Korean War). In lieu of charging them rent, it charged a flat tax of 25% of the total product. But this is far from the full story.
Back in the late 1940s, North Korea was still a mixed economy
As early as November 1946, the state had already started a movement among farmers to ‘voluntarily’ donate rice to the state. Kim Jae Won, a poor farmer from Chaeryong County in South Hwanghae, was so grateful to be given his own land and so full of revolutionary enthusiasm for the new socialist state that he made donations that began the ‘Kim Jae Won Patriotic Rice Donation Movement’.
At the same time, farmers were also required to sell grain to the state at prices set by the state (de facto requisitioning). This meant that while on paper farmers tilled their own land – for which they had tillage rights (though not ownership rights) – they had far fewer actual rights to the harvest, much of which had to be rendered unto the state (the new de facto landlord) in in-kind taxes or through compulsory purchase.
The system appears to have continued like this until the mid-1950s, when the state began to herd farmers into agricultural cooperatives. No longer were peasants to till their own land, now they were to till land with their neighbors, in larger agricultural co-ops that would, at first encompass the village (Ri), and then later the county (a collection of villages, known in Korean as the Kun). Collectivization began in the late 1940s, but didn’t really get going until around 1954-55, and coincided with North Korea’s first real famine.
The new system was a more constrained version of the system that had proceeded it, and put peasants under direct, rather than indirect, state control. The process was largely complete by the end of 1957, when the state banned all private grain sales.
Peasants were effectively ‘enjoying’ a new, modern form of serfdom
However, it took until 1966 for Kim Il Sung to finally announce the abolition of the in-kind tax on agricultural produce. The tax had been imposed in 1946 at the flat rate of 25%, but in 1956 it was cut to 20.1%, in 1959 it was reduced further to 8.4%.
Given that farmers were not allowed to sell their produce on markets, and the price of the major commodities they produced was set by the state, the tax itself had ceased to be all that important.
Nonetheless, these tax cuts, culminating in the end of direct taxation, were trumpeted at the time as being a welfare boon for peasants. The end of rural in-kind taxes also heralded a new stage in agricultural development, with the state investing heavily in electrification, mechanization, and heavier state-control. This came as cooperatives were renamed “collective farms,” and were now considered ‘all-people property’ rather than ‘cooperative property’.
In practice, this just meant that the state spent more money and attempted to extract a larger surplus – while hopefully enriching farmers too. Such efforts continued into the 1970s. Peasants were effectively ‘enjoying’ a new, modern form of serfdom, under the strict control of the state’s agricultural bureaucracy, not free to leave, to farm what they want, or sell the much of the fruits of their labor. Nonetheless, they didn’t have to pay any tax.
ETERNAL TAX HOLIDAY
In a speech broadcast on 23rd March 1946, Kim Il Sung outlined a 20-point manifesto for the provisional government of northern Korea. This was an expansive socialist agenda that included the nationalization of heavy industry and key infrastructure, and also a system of personal income tax.
Initially there were five rates, ranging from 5% to 22.1%, but rates were changed from 6% to 20% in 1947, with a range of exemptions and tax breaks (the data cited here and below can be found in a great Ph.D. thesis written on the North Korean tax system up to 1974 available free here). The rates were subsequently revised in 1955, making the top rate only 9% (with a small additional regional tax levied under a separate law).
Taxes levied on individuals constituted a full 51% of state revenue in 1946. Remember, northern Korea was a mixed economy, and the cities had many merchants and individual handcrafts men and women making money on private markets.
The push to industrialize soon led to a rapid relative decline in the importance of individuals as a source of tax revenue, however. Even just a year later, only 37% of revenue came from individual income tax, dropping to 19.5% in 1948. The number then fluctuated between highs of 27% in 1949 and 19.7% in 1953 at the end of the war.
However, by the mid-1950s, however, the state had transitioned to the construction of socialism. Private commerce was outright banned in 1958, but it was already clear from 1954-55 that the economy was rapidly changing – only 12.7% of state revenue came from individual income tax in 1954 and 9.2% in 1955. By 1958, it had dropped to just 2.3%, and hovered around that point until 1974, when personal income tax was formally abolished.
The push to industrialize soon led to a rapid relative decline in the importance of individuals as a source of tax revenue
According to salary data compiled by Helen Louise-Hunter, most workers didn’t earn anywhere near enough to hit the threshold that would have required them to pay income tax. According to the Cabinet’s Tax Law amended in 1959 (promulgated in 1955), the tax would probably have only applied to high government officials, and highly successful scientists and workers on the culture front, who had special rates for royalties – which were taxed under a different rate.
Yet again, as with the abolition of the in-kind tax on farmers, the abolition of the state’s personal income tax was largely for propaganda purposes. The government derived little actual income from taxing incomes, rates were low, and thresholds were high.
Most of the state’s income comes from its enterprises, which produced the vast majority of goods and services, and ‘generated’ most of the ‘revenue’ for the state.
In reality, money played a passive role, with administrative orders determining how resources were allocated.
Edited by Oliver Hotham
Join the influential community of members who rely on NK News original news and in-depth reporting.
Subscribe to read the remaining 1231 words of this article.
Featured Image: CPC_1183 by nknews_hq on 2016-10-06 14:16:24