근로소득세액공제와 근로소득공제제도의 경제적 효과

Economic Effects of Tax Credit and Special Deduction for Wage and Salary Income

Tax credit and special deduction for wage and salary income are two major mechanisms to lighten the tax burdens of wage and salary income earners. considering the unbalance between tax burdens of wage and salary income earners and of business income earners. Even though these two systems have similar policy purposes, their effects on disposable income and welfare for those wage and salary income earners are estimated to be significantly different. The special deduction for wage and income earners has more regressive effect on income distribution than the tax credit, due to the progressivity of the income tax rates. While the special deduction increases the benefit for wage and salary income earners on average by w1. 18 per unit budgetary cost, the tax credit increases it by w1. 49 per unit budgetary cost: Therefore, the tax credit is proved to be better system than the special deduction in terms of both equity and efficiency. We have two policy recommendations. In the short run, it is better to curb the enlargement of the special deduction and increase the tax credit if the government wants to lighten more the tax burdens of wage and salary income earners. In the long run, it is recommended to unify those two systems with similar policy purposes. When they are unified, we recommend to abolish the special deduction and increase significantly the tax credit for wage and salary income earners along with basic exemtion and other itemized deductions.