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Optimal income tax rates for the Korean economy

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Frame of Image ptimal Income Tax Rates for the Korean Economy†
By YONGSUNG CHANG, SUN-BIN KIM, BO HYUN CHANG* 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. Key Word: Inequality, Korean Economy, Optimal Income Taxes, Progressivity Capital Tax JEL Code: E25, E62, H21
I. Introduction
A
m ong OECD members, Korea is considered a “low-inequality and lowredistribution” country. Figure 1 plots the before- and after-tax/transfer income Gini coefficients for 31 OECD countries. All 31 countries are located below the 45-degree line, indicating that in all countries incomes are redistributed from the rich to the poor. In terms of before-tax/transfer incomes, the Gini coefficient of Korea is the lowest (0.34) among the OECD members, whose average is 0.47. In terms of after-tax/transfer incomes, the Gini coefficient of Korea is abo


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Title Optimal income tax rates for the Korean economy
Similar Titles
Material Type Articles
Author(English)

Chang, Yongsung; Kim, Sun-Bin; Chang, Bo Hyun

Publisher

[Sejong]:Korean Development Institute

Date 2015-08
Journal Title; Vol./Issue KDI Journal of Economic Policy:vol. 37(no. 3)
Pages 31
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding Korean Development Institute; KDI School

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.