Earned income tax credit, EITC, was first legislated in Korea in 2007. It aims to provide working poor with working incentives as well as disposable income. The first payment took place in 2009, and the incentive structure, which was established by law, remained the same until 2011. The upper boundary of qualifying income has stayed at a certain nominal amount for the last 3 years. Hence, surging price levels worked to decrease the real term value of upper boundary income, and yield fewer beneficiaries every year. In order to resolve such problems, the 2011 tax revision changed the incentive structure of EITC. This expanded the upper boundary on income limit from 170 mil won to 250 mil won as well as diversifying incentive formula by number of dependent children.
This report first estimates the additional fiscal resources needed for such expansion of coverage and then aims to analyze the income redistribution effect. For this analysis, the Gini coefficient based on the household income survey data from 2009 were calculated for three cases and compared to each other: market income excluding EITC, market income plus EITC calculated by last year’s formulae, and market income plus EITC with the current expanded structure.
The main findings are as follows. First, additional cost for EITC expansion in 2012 was estimated to be around 271.9 billion won. This comes from deducting 344.5 billion won, estimation for the total EITC payment under the former incentive structure, from 616.5 billion won, estimation for that under the current law. Second, this expansion is expected to be more cost efficient than the initially introduced incentive structure because the expected additional percentage improvement in the Gini coefficient costs less (38.9 bil.won) than its prior form (86.1 bil.won). 0.04% of Gini coefficient improvement is expected from the initial introduction of EITC, where this year’s expansion is expected to improve this further 0.03% to 0.07%.
Chang Yoonjeong
This report first estimates the additional fiscal resources needed for such expansion of coverage and then aims to analyze the income redistribution effect. For this analysis, the Gini coefficient based on the household income survey data from 2009 were calculated for three cases and compared to each other: market income excluding EITC, market income plus EITC calculated by last year’s formulae, and market income plus EITC with the current expanded structure.
The main findings are as follows. First, additional cost for EITC expansion in 2012 was estimated to be around 271.9 billion won. This comes from deducting 344.5 billion won, estimation for the total EITC payment under the former incentive structure, from 616.5 billion won, estimation for that under the current law. Second, this expansion is expected to be more cost efficient than the initially introduced incentive structure because the expected additional percentage improvement in the Gini coefficient costs less (38.9 bil.won) than its prior form (86.1 bil.won). 0.04% of Gini coefficient improvement is expected from the initial introduction of EITC, where this year’s expansion is expected to improve this further 0.03% to 0.07%.
Chang Yoonjeong