This paper discusses general directions for tax reform in Korea and some focal
points related to changing the current tax structure. In order to raise revenue
and reduce efficiency costs, the size of the informal sector and tax evasion in the
formal sector need to be reduced. Contrary to the popular belief, the distributive
function of the income tax would be better served not by raising the top marginal
rate but by reducing cash transactions by the rich self-employed as well as the
extent of income shifting by company owners and managers who leave their
personal income within their company to exploit the rate gap between the
personal and corporate income tax. Considering the immobile nature of
corporate rents and the significant share of corporate taxes in the overall
revenue, this paper suggests, the statutory corporate rates need not to be
lowered hastily. In addition, overly generous tax subsidies toward small and
medium-sized companies need to be streamlined in ways to provide more
support to start-ups and R&D activities.