This paper analyzes macroeconomic effects of tax system change based on a calibrated dynamic stochastic general equilibrium model. Based on the IMF’s Global Integrated Monetary and Fiscal (GIMF) basic model, the model includes a pension module and considers four countries to reflect the future trend in age-related government expenditure and the trade structure of the Korean economy. Key parameters were set based on the latest statistical data and previous research results.

We examine macroeconomic effects of three types of tax system change: the temporary tax reductions to boost the economy, the permanent tax increments to finance the expected age-related or pension expenditure, and realistic tax policy changes in recent years or in the near future of home and foreign countries.

These quantitative exercises give us the following policy implications. First, the tax cut policies for stimulating the economy are less effective than the fiscal spending expansions. Temporary tax reductions may be at best complementary to other government spending policies firming up the policy direction of government in exceptional circumstances such as the economic crisis. Second, we need to start discussions on the structural change of the tax system to finance the long-term age-related spending. The consumption taxes are the most efficient policy measures minimizing the reduction in aggregate output but there is a risk of sparking political opposition because the consumption taxes tends to be regressive and the private consumption will sharply shrink at the time of tax hike. Third, the domestic spillover effects of major countries' tax policies are relatively large due to the small open economy characteristic of Korean economy, so it is necessary to consider preemptive policy responses to mitigate or reinforce the domestic ripple effects.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Characteristics of Korea’s Tax System and Long-Term Fiscal Expenditure Needs
　Section 1 Characteristics of Korea’s Tax System
　Section 2 Projections of Long-Term Fiscal Expenditure Needs Related to Aging

Chapter 3 Recent Tax Policy Changes and Literature Review
　Section 1 Recent Changes in Korea’s Tax System
　Section 2 Recent Tax System Changes in Major Countries
　Section 3 Literature Review

Chapter 4 Model Construction and Parameter Calibration
　Section 1 Model Construction
　Section 2 Parameter Calibration

Chapter 5 Analysis of Tax System Changes
　Section 1 Analysis of Countercyclical Tax System Changes
　Section 2 Analysis of Long-Term Revenue Financing Measures
　Section 3 Analysis of Recent Tax Policy Effects in Major Countries
　Section 4 Sensitivity Analysis

Chapter 6 Conclusion and Policy Implications

References
Appendix
ABSTRACT