The Korean Journal of Economic Studies
Dynamic Revenue Effects of a Corporate Income Tax Increase: Case of Korea
Sunghyun Kim (Sungkyunkwan University), Eunsun Yang (Sungkyunkwan University) and Yoonseok Choi (Korea University)Year 2017Vol. 65No. 2
AbstractThis paper uses a small open two-sector dynamic general equilibrium modelto analyze revenue and welfare effects of a potential increase in corporateincome tax rate in Korea. We use a dynamic scoring method which allows usto analyze dynamic revenue effects of changes in tax rates through modelsimulation. The simulation results suggest that an increase in corporate incometax rate (by 2%p) in both sectors increases total tax revenue by 1.30% in theshort run and by 0.50% in the long run. An increase in corporate income taxrate in the tradable sector only increases total tax revenue by about 1.00% inthe short run but decreases total tax revenue by 0.22% in the long run. Adecrease in investment and a resulting increase in capital outflows due to a taxhike are the main causes of a decrease in tax revenue. Welfare decreaseswhen the tax hike is applied to both sectors or to the tradable sector. Inconclusion, a corporate income tax hike is not a desirable policy in order toraise tax revenue.