The impact of alternative tax systems on regional disparities in Korea

This paper focuses on the effects of alterations of the tax system for the purpose of alleviating the regional disparity in Korea. The proposed policy is a tax-cut policy, decreasing rates in the production tax and increasing the rates in the land tax. The total amount of tax levied by a firm would be reduced except for firms located in the Seoul Metropolitan Area (SMA, classified as group 1 in simulations). It is assumed that a representative firm invests the amount of tax-cut to purchase more inputs to produce more outputs. Fifteen different policies are simulated with several combinations of decreasing rates in the production tax and increasing rates in the land tax. The effects are analyzed in the context of averaging local government financial index, coefficient of variance of local government financial index, averaging the gross regional domestic product (GRDP) per capita, and the Gini coefficient of GRDP per capita. In conclusion, P3-1 is the second-best to be implemented, because GRDP per capita increases and local government financial powers also improve. This policy represents less increase in land tax a moderate cut in production related tax.