The Korean Economic Forum
The Long-term Impact of the Government's Income Redistribution Policy on Income Inequality: From the Perspective of Becker's Equilibrium Inequality in Income
Heonjae Song (University of Seoul)Year 2021Vol. 14No. 1
AbstractIncome inequality is an issue that has received considerable attention for along period. However, it is difficult to find an example that explains income inequality by applying the economic model. This study introduces the economic model of Becker and Toms (1979), which deals with the equilibrium inequality in income distribution, and applies it to the case of Korea to provide implications from the long-term impact of the government’s income redistribution policy using taxation. The model showed that from a long-term perspective, the income tax negatively affects the accumulation of human capital by lowering the after-tax rate of return on the investment in the capital, and this may intensify the income inequality. In Korea, the income inequality estimated by the coefficient of variation of household income was high in the governments that implemented the high tax policy, which is consistent with the prediction of the model. This result suggests that we need to think more carefully about the implementation of tax increase policies to enhance the effect of income redistribution in the short term.