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Optimal Tax Burden Ratio in Korea(EP Vol.11 No.1)

Economic Research Institute (1) 2008.07.09 2608

Optimal Tax Burden Ratio in Korea(EP Vol.11 No.1)

Author: Young Jun Chun, Chong-Bum An

We attempt to predict the optimal tax burden ratio in Korea, using an
altruistic family model. As of 2005, the optimal level of the tax burden ratio,
defined as the ratio of the total tax burden to GDP, is shown to be higher
than the actual tax burden ratio. However, the optimal ratio will fall
substantially to reach 23%-24% by around 2070. This downward trend
reflects the fact that current social insurance policies redistribute the
resources from future generations to the current generations, implying that
tax policies should be designed to mitigate the intergenerational inequity
resulting from social insurance policies. We also show that, in contrast to the
optimal tax burden ratio, the actual tax burden ratio will rise for a
considerable time, to exceed the optimal tax burden ratio from the mid-
2010s, assuming the Korean economy follows the paths of economic
development and fiscal policy which the developed countries have over the
past several decades. This discrepancy between the actual and the optimal
tax burden ratios implies that the current fiscal policies are not effective in
mitigating intergenerational inequity resulting from the social insurance
policies, and that the Korean government therefore needs to maintain a
cautious position in decision making on fiscal policies likely to result in
substantial increases in government expenditure in the future.