The Korea Local Administration Review

The paper analyzes the effects of the local consumption tax and its rateincrease on local revenue allocations, and derives policy implications on itsallocation formula. The initial allocations of the tax revenues among localgovernments become very different from the ultimate allocations throughvarious intergovernmental fiscal transfers. To put it concretely, the ratios ofthe ultimate revenue to the initial local consumption tax in metropolitan andprovince governments varies in a very wide range. The ratios are also widelydifferent between non-Capital metropolitans as well as between non-Capitalprovinces, which implies that the weighted formula in favor of non-Capitalregions does not work as intended. The policy combination, where an increasein the tax rate is accompanied with a decrease in local shared tax in order tokeep the central and local revenues constant, is not acceptable mainly becauseof increasing the fiscal gap among regional governments and between localgovernments. Even if local shared tax keeps in a constant rate of internalnational tax, the allocation method of the local consumption tax should beimproved because the ratios of changes in ultimate revenues to the localconsumption taxes are regionally very different.
□ Keywords: local consumption tax, intergovernmental fiscal transfers,local revenue allocations