Korea’s Tax Structure: Directions for Reform
Roger Gordon (University of California, San Diego)
Joosung Jun (Ewha Womans University)
Korea Institute of Public Finance (KIPF), 2013
Considering the potential costs of reunification and the soaring retirement benefits for the rapidly aging population, Korea needs to reform its tax system with a specific aim to expand the revenue base. Since most taxes distort economic behavior and likely generate inefficiencies, any revenue raising efforts need to be undertaken carefully so as not to undermine economic growth.
This study notes that the current tax structure in Korea is very similar to that seen on average in less developed countries. Tax bases are narrow and personal income taxes play a less significant role, compared to most advanced countries. In addition, Korea has a relatively large size of the informal sector, around 26% of GDP. In such an environment, simply replicating tax systems in the advanced countries might not be the optimal choice.
While discussing various directions to reform the current tax structure in Korea, this study stresses the importance of shrinking the size of the informal sector and reducing the evasion rates in the formal sector. Such efforts could raise both revenue and efficiencies, a much needed recipe for Korea in which financing welfare expenditure without in the process hurting growth potential has become a keen policy priority. Various policy options are explored to encourage firms to shift into the formal sector and to reduce evasion in the formal sector.
Contents
1. Current Korean tax system
2. Conventional recommendations for tax reform
3. Policies that can reduce evasion and informal activity
4. Summary
Korea’s Tax Structure: Directions for Reform
Roger Gordon (University of California, San Diego)
Joosung Jun (Ewha Womans University)
Korea Institute of Public Finance (KIPF), 2013
Considering the potential costs of reunification and the soaring retirement benefits for the rapidly aging population, Korea needs to reform its tax system with a specific aim to expand the revenue base. Since most taxes distort economic behavior and likely generate inefficiencies, any revenue raising efforts need to be undertaken carefully so as not to undermine economic growth.
This study notes that the current tax structure in Korea is very similar to that seen on average in less developed countries. Tax bases are narrow and personal income taxes play a less significant role, compared to most advanced countries. In addition, Korea has a relatively large size of the informal sector, around 26% of GDP. In such an environment, simply replicating tax systems in the advanced countries might not be the optimal choice.
While discussing various directions to reform the current tax structure in Korea, this study stresses the importance of shrinking the size of the informal sector and reducing the evasion rates in the formal sector. Such efforts could raise both revenue and efficiencies, a much needed recipe for Korea in which financing welfare expenditure without in the process hurting growth potential has become a keen policy priority. Various policy options are explored to encourage firms to shift into the formal sector and to reduce evasion in the formal sector.
Contents
1. Current Korean tax system
2. Conventional recommendations for tax reform
3. Policies that can reduce evasion and informal activity
4. Summary