Adequacy of Korea’s Tax Assignment: A Fiscal Federalism Approach

Abstract

This paper investigates whether taxes in Korea are appropriately assigned to different levels of governments within the context of fiscal federalism theory. Although the taxes assigned to sub-national governments conform to the theory in principle, the current local tax system appears to be overly complicated with an excessive number of taxes. A couple of policy recommendations can be made from the analysis presented in this paper. First, it would be beneficial to simplify the local tax system by integrating taxes that are levied on the same tax base. Second, it would be beneficial to reduce the excessive reliance on property taxation by increasing the share of income or sales taxation in the local tax system. Third, it is critical to first understand why sub-national governments seldom exercise rate flexibility and then make political and fiscal institutional arrangements to promote the use of rate flexibility.