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Optimal Income Tax Rates for the Korean Economy

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  • Chang, Yong Sung
  • Kim, Sun-Bin
  • Chang, Bo Hyun

Abstract

Based on a quantitative, heterogeneous agent general equilibrium model, we compute the optimal tax rates for labor and capital incomes for the Korean economy. According to our model, a more progressive income tax schedule along with a higher capital tax rate can increase average welfare by as much as 0.86% of permanent consumption. Approximately 64% of house-holds, those with low assets and low productivity, are better off when a more progressive optimal tax schedule is adopted. Despite the potentially significant welfare gains, our calculation should be interpreted with caution because our benchmark model does not take into account possible capital outflows or the increased administrative costs associated with high taxes.

Suggested Citation

  • Chang, Yong Sung & Kim, Sun-Bin & Chang, Bo Hyun, 2015. "Optimal Income Tax Rates for the Korean Economy," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 37(3), pages 1-30.
    • Handle: RePEc:zbw:kdijep:v:37:y:2015:i:3:p:1-30
    DOI: 10.23895/kdijep.2015.37.3.1
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    References listed on IDEAS

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    1. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    2. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    3. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979.
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    Citations

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    Cited by:

    1. Vardan Baghdasaryan & Hayk Hambardzumyan, 2017. "Optimal Income tax rates with non-democratic political constraints: case of Armenia," EcoMod2017 10405, EcoMod.
    2. Lim, Taejun, 2021. "Coverage Expansion of Universal Health Care and its Impacts on Health Insurance Market and Welfare: the Case of South Korea," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 62(2), pages 141-161, December.
    3. Sergey A. Belozyorov & Olena V. Sokolovska, 2018. "Personal income taxation and income inequality in Asia-Pacific: a cross-country analysis," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 4(3), pages 236-249.

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    More about this item

    Keywords

    Inequality; Korean Economy; Optimal Income Taxes; Progressivity Capital Tax;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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