In this paper we construct the Dynamic Computable General Equilibrium
Model for Korea to analyze the effect of corporate income tax(CIT hereafter)
reduction on the Korean Economy. We analyze and compare the three
different policy alternatives for CIT reduction among which Scenario 1 is CIT
reduction by 5%p at once, Scenario 2 is two-step CIT reduction, and Scenario
3 is five-step CIT reduction during five years from 2008.
Based on policy simulations we find that CIT reduction will increase
investments for all scenarios. Furthermore, Scenario 1 will increase
investments in shortest time in the short run. As a result Scenario 1 will result
in most capital formation. Secondly, when it comes to the effect of CIT
reduction on consumption, for all scenarios consumption will increase in the
long run. The government expenditures will decrease owing to decrease in tax
revenues due to CIT deduction. Therefore, CIT reduction will increase GDP
for all three alternatives both in the short run and the long run. Thirdly,
regarding on the income distribution effect of CIT reduction all income classes
will benefit from CIT reduction so that Pareto improvement will be obtained.
In addition income distribution will also be improved from CIT reform. In
conclusion in terms of efficiency and equity CIT reduction in Korea is
desirable. Policy implication is such that the Korean government should do
CIT reduction immediately.