An Economic Effect Analysis of the Revised Retirement Income Tax System and a Proposal for the Tax System Improvement
Asian Tax Journal Vol. 19 No. 2 (2018), pp. 41-61
Abstract
The Korean Government revised the retirement income tax system in 2014 as follows, which would be enforced from 2016. First, retirement income deduction rates were increased generally and got lower gradually by retirement income. Second, the annual tax multiplied years method was changed from a 5－multiple to a 12－multiple. Third, new retirement income concept, i.e. conversion retirement income was introduced to calculate retirement income deduction, which was breaking away from the basic income tax structure. This paper analyses the economic effects of the revised retirement income tax system on the tax burden by retirement income, the overall tax burden, tax progressivity, and income redistribution. In addition, this paper proposes an improved retirement income deduction method, based on the traditional retirement income. With regard to data, the tax burden by retirement income is analysed by simulation methodology, and the overall tax burden, tax progressivity and income redistribution are analysed using the data of the Statistical Yearbook of National Tax in 2014 published by National Tax Service of Korea. With regard to measurement indices, tax progressivity is calculated using the Kakwani and the Suits indices, and income redistribution is calculated using the Reynolds－Smolensky and the Pf¨ahler indices. The results are as follows. The tax burden of the revised new retirement income tax system increases more as retirement income increases and decreases more as service years increase than that of the former old one. The new tax system compared with the old one can be evaluated as achieving both tax equity and policy effectiveness through tax progressivity reinforcement and income redistribution improvement. The proposed retirement income deduction system applying 10 service year－based deduction rates compared with the revised one can be an appropriate alternative, which will achieve both tax progressivity reinforcement and income redistribution improvement. This paper is valuable in that it evaluates the economic effects of the revised retirement income tax system using real data and provides a proposal for the tax system improvement.
Keywords
- Retirement Income Tax
- Retirement Income Deduction
- Tax Burden
- Tax Progressivity Income Redistribution16)
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