Korea’s tax structure was not fundamentally different from that of many other developing countries. Due to insufficient tax information and a large informal sector, its tax base was initially quite narrow. Nevertheless, Korea increased its tax-to-GDP ratio from around 12 percent in the early 1960s to nearly 25 percent—comparable to the level of advanced economies. How was this achieved?
First, Korea made extensive use of earmarking mechanisms that reduced taxpayer resistance. Linking specific revenues to specific expenditures was widely practiced throughout the budget system and proved particularly effective in mobilizing quasi-taxes such as charges, fees, levies, and contributions.
Second, Korea expanded the rent-generating opportunities available to domestic conglomerates and successfully utilized the corporate income tax (CIT) as a major source of government revenue. Developing countries typically rely heavily on CIT because of limited information on personal incomes. Advanced economies, by contrast, tend to collect a relatively smaller share of revenue from CIT, which functions largely as a form of capital taxation. Korea is unusual in that CIT remained an important revenue source even after the country reached advanced-economy status.
Korea’s tax structure was not fundamentally different from that of many other developing countries. Due to insufficient tax information and a large informal sector, its tax base was initially quite narrow. Nevertheless, Korea increased its tax-to-GDP ratio from around 12 percent in the early 1960s to nearly 25 percent—comparable to the level of advanced economies. How was this achieved?
First, Korea made extensive use of earmarking mechanisms that reduced taxpayer resistance. Linking specific revenues to specific expenditures was widely practiced throughout the budget system and proved particularly effective in mobilizing quasi-taxes such as charges, fees, levies, and contributions.
Second, Korea expanded the rent-generating opportunities available to domestic conglomerates and successfully utilized the corporate income tax (CIT) as a major source of government revenue. Developing countries typically rely heavily on CIT because of limited information on personal incomes. Advanced economies, by contrast, tend to collect a relatively smaller share of revenue from CIT, which functions largely as a form of capital taxation. Korea is unusual in that CIT remained an important revenue source even after the country reached advanced-economy status.