Microsimulation Models for Projecting Long-Term Individual Income Tax Revenues

Published on June 26, 2024
Published by Tax Policy Analysis 1, Estimates & Tax Analysis Department

   Korea's total fertility rate in 2023 is 0.72, the lowest ever and the lowest in the world. This lowest-low fertility rate (total fertility rate of 1.3 or less) has persisted for over 20 years since 2002, dropping below 1 in 2018 (0.98). With increasing life expectancy, the proportion of the working-age population (aged 15 to 64) is projected to decline from 72.1% in 2020 to 46.0% in 2070, while the elderly population (aged 65 or older) is expected to rise from 15.7% in 2020 to 47.5% in 2070, more than tripling.
    Accordingly, this report builds a micro-simulation model using micro data from NaSTaB(National Survey of Tax and Benefit Panel Study) and individual income tax returns to examine the impact of changes in population structure due to low fertility rate and aging on long-term individual income tax revenues, estimating projections from 2024 to 2070. A long-term micro-simulation of individual income tax revenues was conducted because it is essential to utilize the income and taxation information of individual taxpayers to reflect structural changes in individual and household income distribution, which is the tax base of income tax, caused by rapid changes in population structure.
   Consequently, when constructing a long-term income tax forecast model, the NaSTaB, which was mainly used in previous studies, was utilized, as well as individual income tax return data for the first time in Korea, applying the most up-to-date methodology. Under the premise of consistent future population and household projections and macroeconomic outlook, the long-term individual income tax revenue outlook was analyzed using micro data from NaSTaB and individual income tax returns by setting up various scenarios from multiple angles.
   The structure of this report is as follows: Chapter II examines domestic and international previous studies that have conducted long-term individual income tax revenue forecasts. Chapters III and IV provide overviews of the long-term individual income tax revenue forecast models using micro data from NaSTaB and individual income tax returns, respectively, and examine the base year and long-term tax revenue projection models in turn. Chapter V presents the forecast results for each scenario estimated using each data source and compares and analyzes the estimation results for each data set used. Finally, Chapter VI consolidates the estimation results from each dataset used and scenario, outlining future tasks to improve the accuracy of long-term individual income tax revenue forecasts.