Redistributive effect of Korea's income tax: equity decomposition

Abstract

The redistributive effect of Korea's income tax is relatively low as it has too low an average tax rate irrespective of high progressivity. The most serious problem is the excessively high level of horizontal inequity with unequal tax treatment of equal income groups. By examining changes over three research periods (1991, 1996, 2000), it was discovered that horizontal inequity with classical notion was the most serious in 1996 as it allowed extremely generous deductions and exemptions at that time. It is illustrated that Korea's income tax system can have a greater redistributive effect while increasing the level of horizontal equity.

Notes

Berliant and Strauss (1985) show two examples for the independence between the rank-preserving principle and the classical notion of horizontal equity. One is the case which satisfies the principle of rank preserving, but not the equal treatment of equals. The other is the case which satisfies the equal treatment of equals, but not the rank preserving principle.