KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR International Comparison of R&D Tax Incentives and Their Policy Implications

The research report examines tax support systems for private corporate research and development activities, comparing Korea's system with those of other major 31 countries. While Korea provides differentiated support based on company size and specific technology types through tax credits, general R&D expenditure support, particularly for general enterprises, is notably low compared to other countries. Historically, Korea's R&D tax support was very high in the early 2000s, but support for both small and medium-sized enterprises and support for general enterprises has stagnated or decreased since 2010, while other major countries have expanded their support, leading to a reduced gap for SMEs and a wider gap for general enterprises compared to the international average. By benchmarking Korea’s R&D tax incentives against those of other leading economies, this research assesses the support mechanisms for private-sector innovation, a vital catalyst for the nation’s long-term economic growth, and suggests strategic recommendations for future policy.

Summary

Policy Study KOR Evaluating Fiscal Rules over Business Cycles and Population Aging

This paper evaluates the general-equilibrium effects of escape clauses within fiscal rules in an economy subject to business-cycle fluctuations. It embeds an AR(1) total factor productivity (TFP) supply shock into a closed-economy overlapping generations (OLG) model to conduct a 70-year transition-path analysis by incorporating Statistics Korea’s projections of annual changes in population age structure and mortality. To ensure high predictive accuracy while capturing annual demographic shifts, the model employs a Krusell·Smith (1998)-type linear approximation for aggregate forecasting functions, estimated and applied on a year-to-year basis.

The escape clause is modeled as a rule that adjusts the fiscal deficit-to-GDP ratio across three TFP states. In the absence of population aging, the escape clause reduces tax volatility but increases government debt volatility. The higher debt, through crowding-out effects, raises volatility in aggregate capital and GDP, potentially amplifying the persistence of tax shocks. By contrast, the volatility of aggregate assets is mitigated in part: in booms, the escape clause increases debt, which lowers interest rates via crowding out and partially offsets asset accumulation; in recessions, the mechanism cushions against asset declines. When incorporating population aging, overall macroeconomic volatility rises, and the escape clause further magnifies fluctuations in government debt, aggregate capital, and GDP. These findings suggest that under supply shocks, fiscal easing should be limited to targeted support for vulnerable households, with escape clauses gradually narrowed as aging intensifies.

Summary

Policy Study KOR Economic Effects of Identified Exogenous Tax Policy Shocks: A Narrative Approach for Korea

This study addresses a key challenge in estimating the macroeconomic effects of fiscal policy: the difficulty of credibly identifying policy shocks. Using a narrative approach, we construct a quarterly series of exogenous tax policy shocks for Korea over 2005~2023 and use it to examine the short-run macroeconomic effects of tax policy.

The identified exogenous tax shocks exhibit a weaker association with business-cycle fluctuations than conventional measures based on observed tax revenue changes, suggesting that they may better capture discretionary policy actions rather than automatic stabilizers. We further assess exogeneity using checks based on GDP forecast errors (“surprises”), aiming to mitigate endogeneity concerns that arise when revenue fluctuations are used directly as shocks.

Empirical analysis based on a Bayesian vector autoregression (BVAR) indicates that exogenous tax cuts generally raise real GDP and prices in the short run. The effects vary across tax categories: labor tax cuts show relatively larger expansionary impacts on output, while consumption tax cuts display limited output effects despite pronounced revenue losses. Capital tax cuts tend to operate with longer lags, accompanied by relatively large short-run revenue declines. These patterns suggest that tax policy can affect the economy through heterogeneous transmission channels depending on the tax base, policy objectives, and the revenueoutput trade-offs. We also find that the response of total tax revenue after tax cuts is sometimes statistically insignificant, consistent with offsetting forces between direct revenue reductions and revenue gains induced by higher output.

Rather than offering prescriptive recommendations for specific taxes, this study provides a transparent framework for identifying and quantifying tax policy shocks and documents the relative patterns of macroeconomic and revenue responses across tax types and motivations. Important limitations remain, including residual uncertainty in narrative classifications when reforms pursue multiple objectives and the need for additional robustness analyses given the sample length and shock frequency. Future research could refine classification rules, compare alternative identification strategies, and integrate spending shocks to strengthen policy implications.

Summary

Policy Study KOR The Macroeconomic Effects of Social Welfare Reform in South Korea

This study examines the macroeconomic and welfare impacts of replacing South Korea’s targeted income support programs with a universal income support system. A life-cycle overlapping generations (OLG) model with heterogeneous households is constructed to reflect existing programs, such as basic livelihood assistance, child allowances, earned income credits, and public pensions, and to incorporate institutional features and household-level income distribution, including joint household labor decisions.

Simulations of five policy scenarios show that universal benefit increases aggregate output but reduces social welfare due to weaker safety net effectiveness. Program impacts vary, suggesting well-designed targeted schemes may outperform universal income support. Findings also highlight the importance of aligning income support policies with household needs while ensuring fiscal sustainability.

Summary

KDI FOCUS Health Insurance Expenditure Growth: Driving Factors and Policy Implications

As financing tools such as higher premiums and government subsidies are increasingly unsustainable, national health insurance system faces growing pressure to optimize spending. Empirical analysis of health insurance expenditure drivers identifies price increases as the dominant factor. In particular, rising service prices in local primary care clinics rather than utilization rates are disproportionately contributing to overall expenditure growth. For efficient management of health insurance resources, policy efforts should focus on strengthening the primary care function of local clinics by reforming the current fee-for-service payment model, while also institutionalizing a robust expenditure review framework.

- Despite a sharp rise in healthcare expenditure, Korea’s health insurance system lacks mechanisms to control spending.

- Premium increases and subsidy expansions are becoming unsustainable as financing tools, underlining the need for effective expenditure control.

- Effective expenditure management requires understanding the drivers of health insurance spending.

- From 2009 to 2019, price accounted for 76.7% of the increase in health insurance expenditure, with quantity and demographics contributing 14.6% and 8.6%, respectively.

- The price contribution to health insurance expenditure growth has increased over time.

- While the demographic contribution remains significant, it has declined.

- In 2019, the contribution of price in outpatient services accounted for 38.7% of health insurance expenditure growth, making it the largest contributor.

- As inpatient utilization slows and price gains greater influence, the inpatient quantity contribution to health insurance expenditure growth has declined.

- In 2019, price in primary care clinics accounted for 24.9% of the increase in health insurance expenditure―the highest among all institution types.

- Quantity contributions have declined most noticeably in primary care clinics and tertiary hospitals.

- Among individuals aged 65+, demographic change was the primary contributor to health insurance expenditure growth, while the influence of price has expanded in recent years.

- Among the young-old population (65-74), a decline in quantity contribution has moderated the growth of health insurance
expenditure.

- For those aged 85+, the demographic and quantity factors remain the primary contributors to health insurance expenditure growth.

- The decline in healthcare utilization among the young-old population and the gradual slowdown in health insurance expenditure growth suggest the possibility of healthy aging.

- Managing health insurance expenditure requires exploring ways to supplement the current fee-for-service payment system.

- Supplementing the fee for-service model is also necessary to strengthen the primary care role of local clinics.

- Proactive investment to promote health among the young-old population is required.

- For those aged 85+, management strategies for end-of-life care, including the use of life-sustaining treatments, are needed.

- A formal evaluation framework for health insurance expenditure should be established to support fiscal management strategies.

Summary

Policy Study KOR A Study on Strategic Procurement

Around the world, public procurement is increasingly being designed to serve broader social objectives ― such as supporting disadvantaged groups or promoting innovation ― alongside its traditional economic goals. This trend is also gaining momentum in Korea. In this paper, we refer to the use of procurement to achieve these secondary aims as “strategic public procurement” and explore its potential benefits and costs. Specifically, we conduct an empirical analysis of strategic procurement practices that prioritize certain companies or products, with a focus on Korea’s purchase target ratio system. Our findings suggest that procurement aimed at fostering innovation can be economically effective, whereas evidence supporting procurement targeted at disadvantaged groups is less consistent.

Summary

Policy Study KOR Decomposing Health Care Expenditure Growth in Korea

This paper analyzes healthcare expenditure growth in Korea using National Health Insurance Claims data from 2009 to 2019. Healthcare expenditure growth is decomposed into three components at the disease level: service utilization growth, service price growth and demographic transition.

The decomposition shows that growth in prices is the primary driver of healthcare expenditure growth since 2013 at the aggregate level. The main driver has shifted from service utilization growth towards service prices growth. The contribution of demographic shift remains stable over the period, however the contribution pattern varies across age group, type of services and suppliers.

Decomposition of healthcare expenditure of elderly shows different pattern compared to aggregate level decomposition. Demographic shift is the main driver of healthcare expenditure growth among elderly. The contribution of service utilization decreased and suggests possible healthy aging.

Summary

Policy Study KOR A Study on Property Tax Incidence

This study examines the incidence of property taxes, focusing on whether the property tax, which is levied on the property owner when the owner and the user are different, is passed on to the user. If the tax is borne by the owner, it acts as a capital tax; if passed to the user, it functions as a consumption tax. Additionally, if the revenue from the tax is used to improve local environments, it could be considered a benefit tax.

Through empirical analysis, the study explores how changes in the comprehensive property tax system affect housing rental prices. The findings show that these changes have little impact on the rental market. No evidence was found to suggest that rental prices increase as the publicly assessed value rises near the taxable threshold. Moreover, using a difference-in-differences method to compare rental prices before and after the policy change, the analysis confirms that the strengthened system did not lead to higher rental prices for properties subject to the tax.

In conclusion, the results suggest that the tax is best viewed as a capital tax. Taxing housing assets may reduce investment and hinder the efficient allocation of capital. Since South Korea's property tax level is in line with the OECD average, it is important to minimize changes to the system, analyze its effects, and then proceed with reforms.

Summary

Policy Study KOR Economic Effects of Capital Gains Tax on Housing

This study examines the economic effects of South Korea’s capital gains tax reforms on housing, focusing on the lock-in effect ― a contraction in housing transactions following higher tax rates. In 2017, amid a prolonged housing boom, the government raised capital gains tax rates for multi-homeowners. Analysis of transaction volumes and prices around the announcement and implementation reveals a pre-reform surge in sales and gifts, followed by a post-reform decline. A temporary suspension of the tax in 2019 again triggered a short-term uptick in transactions during the grace period.

These findings suggest the tax policy failed to achieve its intended goal of stabilizing the housing market. The lock-in effect, compounded by low policy credibility, likely contributed to diminished public trust in housing policy. Moving forward, housing tax reforms should be anchored to fundamental taxation principles, prioritizing efficiency and equity while promoting system stability to ensure predictable obligations for taxpayers and bolster confidence in the housing market.

Summary

Policy Study KOR Tax Revenue Structures in an Aging World: International Comparisons and Policy Insights

This study aims to foster informed public discourse on inevitable tax increases in response to the substantial fiscal pressures of population aging. Chapter 2 examines how major advanced economies that experienced population aging earlier than South Korea mobilized financial resources during this demographic shift. Chapter 3 empirically analyzes tax reform strategies that reduce revenue volatility, support economic growth, and promote equitable taxation. The findings support strengthening value-added tax (VAT) and personal income tax―a widely endorsed approach mong tax experts and implemented in major advanced economies. However, Korea has limited experience with universal tax increases and faces considerable public resistance to such measures. To assess whether these concerns are based on empirical evidence, Chapter 4 examines 150 cases of VAT or personal income tax increases implemented in major advanced economies. The findings reveal that only 20% of these tax increase cases resulted in a change in government. Finally, Chapter 5 argues that concerns over political repercussions should not preclude universal tax increases as a key policy option for enhancing the sustainability of public services. The study also emphasizes two prerequisites for the government to address before initiating public discourse on tax increases: earning public trust in the efficiency and effectiveness of fiscal expenditures through structural reforms and improving the general public’s fiscal literacy.

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