Basic Report

The government plans to increase the national tax and local tax ratios from 8:2 to 7:3 through the expansion of Local Consumption Tax and Local Income Tax in the short run, and to increase it to 6:4 over the long term. It is necessary to measure the ripple effects on the interregional fiscal capacity gap when the planned revenue decentralization reform is implemented.
   In this regard, this study establishes the role of the Ordinary Local Share Tax and takes the position that a countermeasure should be prepared in order to achieve policy objectives. The Ordinary Local Share Tax regarded financial guarantee as for the main function while fiscal equity as an additional function. As the relationship between the financial guarantee and the fiscal equity function became vague, it was criticized in terms of transparency, objectivity, and rationality of the calculation system. Therefore, in order to improve the unreasonable elements of the current calculation system while enhancing the fiscal equity function against revenue decentralization, the identity of the Ordinary Local Share Tax should be established.
   In this study, we empirically examined the policy achievements of Ordinary Local Share Tax in terms of the financial guarantee, fiscal equity, and regional balanced development functions. Additionally, we analyze the ripple effects on the financial guarantee and fiscal equity assuming that the revenue decentralization reform is implemented.
   The empirical results are summarized as follows. The Ordinary Local Share Tax achieved a financial guarantee function while complementarily play a role for fiscal equity function. The fiscal equity function of the Ordinary Local Share Tax also played a role in facilitating regional balanced development. However, fiscal equity function is deteriorating recently and the revenue decentralization is expected to deteriorate further from current status. In terms of balanced development, the weakening of the fiscal equality function of the Ordinary Local Share Tax is expected to have a negative impact on the regional economic gap.
   We show that Ordinary Local Share Tax contributed to solving the relative poverty ratio of Local Tax by analyzing the poverty gap index. In particular, the relative poverty ratio of the metro cities and province from the local tax was completely eliminated by the grant of the Ordinary Local Share Tax. This reduction of the relative poverty ratio had a significant impact on the steady increase in the total amount of Ordinary Local Share Tax. This suggests that the Ordinary Local Share Tax takes a very important position to operate the financial guarantee function under 19.24% of the internal tax rate scheme. The financial guarantee function of the Ordinary Local Share Tax is also confirmed in the panel Vector Autoregressive (VAR) model and the Vector Error Correction (VEC) model. Variance decomposition of the impulse response function and the forecasting error show that the impact of the fiscal shortage on the Ordinary Local Share Tax was temporary and its impact on the Ordinary Local Share Tax fluctuations was extremely limited. The long-run equilibrium adjustment coefficient showed a positive sign, indicating that the Ordinary Local Share Tax had a mean-reverting tendency to its long-term equilibrium even if the imbalance occurred due to the lack of funds. In other words, the Ordinary Local Share Tax had a tendency to absorb the financial shortage problem in a short period of time and then return to the original level. Therefore, it is understood that the Ordinary Local Share Tax operates basically in the direction of guaranteeing the long-term balanced grant to be issued to the local governments.
   In contrast to financial guarantee function, the fiscal equity function of Ordinary Local Share Tax has deteriorated in recent years. The fiscal equity function has been improving since 2002, but it has deteriorated since 2014 and the redistribution function between the metropolitan area and the non-capital region has weakened. In this situation, if the fiscal decentralization plan is actually implemented, the fiscal equality between the regions, the metropolitan area, and the non-capital region will fall back, and the poverty ratio resulting from the relative deprivation will increase again. These results show that the calculation system of Ordinary Local Share Tax has been steadily developed in order to promote balanced development. However, ① the basic demand is a dominant factor, ② the basic demand is mostly affected by the population size, ③ demand reinforcement for the underdeveloped regions is insufficient, and ④ the regressiveness of Ordinary Local Share Tax limits the redistributive effect.
   Under this circumstances, if the planned fiscal decentralization initiative is implemented, it is probable that the inter-regional fiscal capacity gap will be widened, and the Ordinary Local Share Tax is limited to fill the gap. Therefore, this study proposes to review the restructuring of the local share tax system so that policy objectives and policy instruments have a one to one correspondence. ① The Ordinary Local Share Tax currently has an identity to achieve the financial guarantee function. The scope of the financial guarantee is to supplement the present demand for basic demand to some extent, and the calculation system maintains the current scheme. ② The fiscal equity function requires a separate financial support system, like a Regional Balanced Development Grant. This grant will incorporate elements that perform the fiscal equity function within the Local Share Tax. The integration target is Real Estate Share Tax and Regional Synergic Development Fund based on the regional balanced demand in the Ordinary Local Share Tax. The allocation criteria for the grant is designed to achieve these goals after setting objectives for the fiscal equity level. In this study, a standard entity within groups is selected, and then a method of allocating over 90% of the per-capita financial strength of the standard entity is suggested. In this case, cares should be taken not to cause a significant rank inversion problem. In addition, safety-nets like the UK' s Revenue Support Grant system should be prepared to cushion the shock.
   On the other hand, alternative measures to enhance the fiscal equity function within the current calculation system can be considered. First, the introduction of the differential inclusion rate scheme can be considered. The target of the differential inclusion rate is the standard fiscal revenue, which is based on the standard poverty rate of local tax. The introduction of the differential inclusion rate system can improve the fiscal equality effect. However, in some cities and counties, Ordinary Local Share Tax revenue was greatly reduced. In order to increase the acceptability of local governments, the differential inclusion rate system should be introduced along with Local Income Tax expansion. Next, we can also consider fine-tuning of the regional balanced demand calculation system. The underdeveloped region selection criteria need to be improved to be able to consider the declining population. In particular, the population decline rate should be measured over a 30 years period. The weighting given to the underdeveloped region to cover general and administrative expenses also need to be increased. However, in this case, in order for Fiscal Equity function to be rewritten, it must be raised simultaneously with the related regional balanced demand measurement items.