The Korean Economic Review
Intergovernmental Distribution of VAT Revenue in Korea: Local Consumption Tax
Jeongwan Kim (Daejin University)Year 2014Vol. 30No. 1
In Korea, local consumption tax (LCT) has been established as a form of VAT revenueshare in 2010. LCT takes 5% of the national VAT revenue as the financial base anddistributes it to the local governments based on the regional sharing ratio of private finalconsumption expenditures (vertical equity) and weighting system to mitigate regionalfinancial disparity (horizontal equity). This paper first evaluates current LCT distributionin terms of both equities, suggesting that new distribution indices be needed to satisfy bothgoals. Before producing them, by reassessing the status and the goal of LCT, this papersuggests LCT as a new local transfer, not a local tax, should pursue another goal, thecorrespondence between production and incidence of regional value-added which is VATresource and ultimately LCT base, because its interregional migration is substantial inKorea. Based on such status and goals, new distribution indices are suggested and thefindings are evaluated.