Abstract

Based on the finance panel data of the Korea Institution of Public Finance, this study investigates the effect of income type and composition on taxpayers’ economic features in risk aversion (“RA” hereafter) and tax compliance (“TC” hereafter). First, with regard to taxpayer’s income type, it is found that as proportion of business income in the total income of household members increases, RA becomes weakened while as that of real estate rental income increases, RA becomes strengthened. As for TC, it is found that as RA and the proportion of labor, capital, and real estate rental income increase, TC increases, which is consistent with the general expectation that TC would increase as RA increases. Second, regarding the taxpayer’s income composition, the higher the relative ratio of business income compared to stable labor income, the lower the taxpayer’s RA. However, as the relative ratio of real estate rental income and capital income increases, RA increases. Summing up, those results show that both income type and composition have significant influence on RA, taxpayers’ important economic feature, and RA also affects both TC and tax avoidance. Therefore, in order to improve the effects of tax policy and administration, the optimal level of tax compliance and collection costs should be decided with the consideration of the characteristics of both tax type and composition. This study provides policy implications on the impact of income types and composition of household members on the economic decision－making of taxpayers. In addition to advanced research design through clear variable measurement, etc., it has differentiated contributions from previous studies through detailed empirical analysis based on reliable large－scale data provided by national research institutes.

Keywords

• Income type
• Income composition
• Risk aversion
• Tax compliance
• Tax avoidance

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