Abstract

This paper analyses the effect of 2014 revised earned income tax on tax progressivity and income redistribution using simulation methodology. The focused revised tax systems are the revision of earned income deduction rate and the change of income deduction method into tax credit method on itemized special deductions. The earned income deduction is corresponding to necessary expenses. Tax progressivity indices are the Kakwani index and the Suits index, and income redistribution indices are the Reynolds－Smolensky index and the Pf¨ahler index. Fundamental analyses are done using random income distribution having the Gini coefficient 0.331 similar to that of Korean whole household recently－announced by Statistics Korea. Additional analyses are done using random income distributions having the Gini coefficient below 0.3 or above 0.4. These results are mutually compared. Simulation results are as follows. The revision of earned income deduction rate weakens tax progressivity and strengthens income redistribution by overall tax burden increase. The change of income deduction method into tax credit method on itemized special deductions strengthens both tax progressivity and income redistribution. As the tax credit rate increases, both tax progressivity and income redistribution are strengthened. Too much itemized special deductions of high－income earners can weaken income redistribution. Tax credit method on itemized special deductions can be evaluated as desirable tax system achieving both effectiveness and equity through tax revenue increase, progressive taxation and income redistribution improvement.

Keywords

• Tax Progressivity
• Income Redistribution
• Earned Income Deduction
• Itemized Special Deduction
• Income Deduction Method
• Tax Credit Method

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