Revenue volatility and forecast errors: evidence from Korean local governments

ABSTRACT

We empirically analysed the effects of revenue volatility on forecast errors using a panel data set of Korean local governments over the period 2002–2016. Panel data analyses, conducted for acquisition tax, local education tax, and total tax revenue, found that revenue volatility has statistically significant and consistent effects on forecast errors. These findings carry both theoretical and policy implications. In theoretical terms, they suggest that when identifying factors influencing forecast errors, one should take revenue volatility into account, in addition to the economic, organisational, and political factors that have been considered by previous studies. In terms of policy implications, in order to improve the accuracy of revenue forecasts, local tax administrators should analyse the cyclical variability of each tax and reflect the results in the forecasting models.

KEYWORDS:

• Forecast error
• revenue volatility
• tax administration
• revenue forecasting
• Korean local government

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Korea’s local governments are divided into upper-level local governments (also called regional governments) and lower-level local governments (also called municipal governments). Being above lower-level local governments, upper-level local governments have jurisdiction over a larger area and more residents. The upper-level local governments comprise one special metropolitan city (Seoul), six metropolitan cities (including Busan, Incheon, Daegu, Gwangju, Daejeon, Ulsan), eight provinces (Gyeonggi, Gangwon, Chungnam, Chungbuk, Jeonnam, Jeonbuk, Gyeongnam, Gyeongbuk), one special autonomous city (Sejong), and one special autonomous province (Jeju). Of these, the special autonomous city (Sejong) and the special autonomous region (Jeju) were excluded from the analysis due to their geographic location, industrial structure, and heterogeneous tax system. The lower-level local governments include rural counties, cities, and districts.

2. Metropolitan city taxes include acquisition tax, leisure tax, tobacco tax, local consumption tax, local income tax, automobile tax, local development tax, local education tax, and resident tax (for metropolitan cities, resident tax (employee, property) corresponds to autonomous region tax). Province taxes include acquisition tax, licence registration tax, leisure tax, local consumption tax, local development tax, and local education tax.

3. As an ordinary tax, acquisition tax is levied on the acquirer of property, such as real estate and mechanical equipment, accounting for a large portion of local taxes. Local education tax is a special-purpose tax imposed to raise financial resources needed to improve the quality of education. It is levied by applying a certain tax rate to each local ordinary tax. The rate levied ranges from a minimum of 10% (resident tax) to a maximum of 40% (leisure tax).

4. Budgeted revenue was used as the forecast error.

5. To correct the fiscal imbalance among local governments and to preserve their scarce financial resources, the Korean central government operates an intergovernmental fiscal coordination system to provide fiscal support to local governments. A local-shared tax, various grants-in-aid, and the like are used to operate the system. For local governments, having a high proportion of these fiscal transfers as part of their total financial resources indicates low fiscal strength.

6. According to Statistics Korea, the average annual growth rates of home prices and consumer prices during the study period were 4.26% and 2.65%, respectively.

Additional information

Funding

This work was supported by the Hankuk University of Foreign Studies Research Fund.

Notes on contributors

Tae-Ho Lee

Tae-ho Lee is a doctoral student in the Department of Public Administration at the Yonsei University in Seoul, South Korea and works as a researcher at the Korean Educational Development Institute (KEDI). His research activities focus on financial management, local finance, and education finance.

Sunjoo Kwak

Sunjoo Kwak is an associate professor in the Department of Public Administration at the Hankuk University of Foreign Studies in Seoul, South Korea. His research interests include public budgeting and finance, fiscal management, and political economy.