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한국의 자본코스트와 법인실효세율에 관한 연구(Research on Korea’s cost of capital and corporate tax effective rate) : 산업별&자본별 시계열분석(Time-series analysis by industry and capital)

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Title 한국의 자본코스트와 법인실효세율에 관한 연구(Research on Korea’s cost of capital and corporate tax effective rate)
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Sub Title

산업별&자본별 시계열분석(Time-series analysis by industry and capital)

Material Type Reports
Author(Korean)

김준영

Publisher

[서울]:한국개발연구원

Date 1991
Series Title; No 정책연구시리즈 / 91-32
Pages 144
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding KDI; KDI School

Abstract

The purpose of this study is to analyze the impact that investment incentives have on the corporate tax burden, as well as explore policy improvements.
Capital formation is one of the most important variables affecting the long-term growth of the economy and distribution of income. There are many ways of forming optimal capital; however, the most inclusive and effective method is through financial and fiscal policy. Even in the case of Korea, in order to expedite corporate capital formation, the government offered support in the form of tax relief and special tax incentives to major industries. However, many experts argued that special tax incentives distorted fairness and compromised the effectiveness of the economy, resulting in the policy’s removal around the mid-1980s.
A time-series analysis on Korea’s effective tax rate resulted in several findings. Until 1967, the rate difference among industries was significant. For the heavy chemical industry, however, the gap was relatively smaller than other industries due to special policy measures. From 1967 to 1981, inflation continued, thus creating much incentive to trade based on building equity. When comparing the effective tax rate and actual corporate tax rate, industries with low debt ratios (e.g. oil refining, fabricated metal) indicated a small difference between the two rates; while industries with high debt ratios (e.g. food industry) indicated larger differences. Also, industries that received special tax incentives from the 1960s to the 1970s (e.g. mining and chemicals, primary metal) presented a low effective tax rate. After 1987, however, the difference among industries decreased. When analyzing the actual corporate tax rate in terms of capital, the machinery and equipment industry showed the lowest rate, and the transportation industry appeared to have the highest rate.
However, in terms of cost, the capital analysis concluded that infrastructure and buildings presented the lowest cost of capital while transportation had the highest cost. It appeared that during the investment tax incentive period, the effect of the tax reduction system was highest on the cost of capital than on the investment tax amount deduction and special depreciation cost. On the cost of capital side, industries that received the most corporate tax incentives were nonmetallic mineral, primary metal, general equipment, chemical products, and transportation; and industries such as publications, oil refining, coal and oil, optical and precision, finance and construction received relatively low corporate tax incentives compared to other industries.
Based on the above analyses, it can be concluded that because of special tax incentives on certain industries, there is some distortion in the allocation of resources and differences among the industries; and even among similar industries, there are differences in the cost of capital, which led to investment in buildings and land rather than machinery. To add to this, high inflation, which appeared during economic development aligned with tax incentives, also weakened the financial structure of the businesses. In 1986, the Act on Tax Incentives towards Major Industries in the Tax Reduction and Exemption Law was abolished. However, this did not reduce the difference in cost of capital and effective tax rate amongst sectors. In this respect, a tax incentive policy that can decrease variations among sectors’ investment in production is needed.