Distributional Effects of Taxes and Benefits in Korea
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A simulation model has been developed in Korea, named Korea Institue of Publc Finance Simulation Model (KIPFSIM), which aims to estimate the effects of taxes and transfers in Korea. The current version of KIPFSIM adopts a static approach combined with a zero-elasticity assumption that there will be no change in labor supply and consumption decisions even after changes in taxes and transfers. KIPFSIM uses a representative sample from the Household Income and Expenditure Survey, compiled and released by the Statistical Office of Korea. Using KIPFSIM, we investigated the distributional effects of the proposed income tax cut, with hypothetical changes in taxes and transfers, which is set to be enacted in 2009 and 2010. We found that the benefit of the income tax cut is concentrated mostly on high-income taxpayers in terms of absolute value, but more on middle-income taxpayers in terms of percentage of the tax burden. Therefore, the new income tax law is considered to strengthen the progressive nature of the tax code and to lower tax burdens and tax revenue. We also found that after-income-tax income inequality, as measured by Gini coefficient, was slightly worsened, primarily due to the decrease in income tax revenue, which helps equalize income distribution.
Abstract
A simulation model has been developed in Korea, named Korea Institue of Publc Finance Simulation Model (KIPFSIM), which aims to estimate the effects of taxes and transfers in Korea. The current version of KIPFSIM adopts a static approach combined with a zero-elasticity assumption that there will be no change in labor supply and consumption decisions even after changes in taxes and transfers. KIPFSIM uses a representative sample from the Household Income and Expenditure Survey, compiled and released by the Statistical Office of Korea. Using KIPFSIM, we investigated the distributional effects of the proposed income tax cut, with hypothetical changes in taxes and transfers, which is set to be enacted in 2009 and 2010. We found that the benefit of the income tax cut is concentrated mostly on high-income taxpayers in terms of absolute value, but more on middle-income taxpayers in terms of percentage of the tax burden. Therefore, the new income tax law is considered to strengthen the progressive nature of the tax code and to lower tax burdens and tax revenue. We also found that after-income-tax income inequality, as measured by Gini coefficient, was slightly worsened, primarily due to the decrease in income tax revenue, which helps equalize income distribution.
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