We develop an optimal-control general equilibrium model of the optimal tax
mix among the labor income tax, the capital tax and the consumption tax,
which incorporates the trade-off between the efficiency and the equity. We
explicitly consider a flexible social welfare function that assigns different
weights on the efficiency measured by per-capita GDP and the equity
measured by Gini coefficient. It turns out that the current tax mix of Korea
puts more weight on the efficiency (0.6~0.7) over the equity (0.3~0.4).
Regarding the possible tax reform in the future, we should increase the ratio
of the consumption tax to GDP by 0.23~0.66%p if we put higher weight on
the efficiency side. If we put higher weight on the equity side, we should
increase the ratio of the labor income tax to GDP by 0.09~0.50%p. Finally the
model suggests that the optimal portion of the capital tax does not respond
much to the changes in the social preferences represented by the changes in
weights on the efficiency and the equity.