This paper uses a small open two-sector dynamic general equilibrium model
to analyze revenue and welfare effects of a potential increase in corporate
income tax rate in Korea. We use a dynamic scoring method which allows us
to analyze dynamic revenue effects of changes in tax rates through model
simulation. The simulation results suggest that an increase in corporate income
tax rate (by 2%p) in both sectors increases total tax revenue by 1.30% in the
short run and by 0.50% in the long run. An increase in corporate income tax
rate in the tradable sector only increases total tax revenue by about 1.00% in
the short run but decreases total tax revenue by 0.22% in the long run. A
decrease in investment and a resulting increase in capital outflows due to a tax
hike are the main causes of a decrease in tax revenue. Welfare decreases
when the tax hike is applied to both sectors or to the tradable sector. In
conclusion, a corporate income tax hike is not a desirable policy in order to
raise tax revenue.