This paper investigates a real business cycle model with endogenous capitalincome and labour income taxes under the incomplete competitive markets.Our model is able to duplicate the feature of the stylized facts of businesscycles in Korea. Under the incomplete competitive markets, a positiveproductivity shock increases income and then expands government expendituremore than consumption, and then requires the increases of government bondsupply. However, the tax rates of both labour and capital incomes decreasetemporarily because the supplies of government bonds have more flexibilitythan tax rates to finance the government expenditure.