A study on the effect of tax resource transfer on horizontal fiscal equity: A study of local consumption tax

Abstract

This study explored the effect of introducing Local Consumption Tax (LCT) on horizontal fiscal equity among local governments by analyzing the Coefficient of Variation (CV) of Local Tax (LT) from 2005 to 2014. It demonstrated that the introduction of LCT and its weighting system contributed to mitigating the regional fiscal gap of South Korea through both an analysis of per capita and analysis of cost index considerations. The CVs of LT had significantly decreased (which can be equated to improvement of regional equity) since 2010 when the LCT was introduced. By using the subtraction methods of LT-LCT, It also confirmed that this change was caused by the introduction of LCT. This degree of change was much greater when applying weight system than when it was not applied. In short, this study had found that the introduction of LCT and the application of regional differential weights have a positive effect on fiscal equity among local governments in South Korea.