Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

An Economic Analysis of the Progressivity of Income Taxes Using a Dynamic General Equilibrium Model

Vol.29, No.4, December , 16–60


English Version |  Korean Version
  •   (Ewha Womans University)

  •   (Hanyang University)

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Abstract  

This paper explores the effect of the progressivity of income taxes on the distribution of income and consumption across households as well as the aggregate output in Korea. Using Korean administrative data on income and tax by income percentile,we find that the post-2012 progressivity of Korean income taxes is double the pre-2012 progressivity. By building a dynamic general equilibrium model with heterogeneous agents, we quantify the long-run effect of the increased progressivity of income taxes on Korean economy. We find that the more progressive income taxes increase the government's tax revenue, while reducing the dispersion in income and consumption across individuals. However, the bottom decile of the income distribution is the only group that experiences a rise in consumption, while the consumption of all other income deciles is reduced. This is attributed to the large decline in the aggregate capital. Faced with the increased tax burden, high income earners reduce their savings, causing the aggregate capital and thereby output to decrease.


Keywords
   progressivityoftheincometax,generalequilibrium,incomedistribution

JEL classification codes
   D3, E2, H2
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