Abstract
This study examines the macroeconomic effects of a recent income tax revision in Korea using a dynamic stochastic general equilibrium (DSGE) model with heterogeneous households. The study utilizes a simple net tax function that reflects the current tax-benefit structure and estimates the function parameters using National Survey of Tax and Benefits data. We propose a novel approach to identify how the income tax revision affects the net tax function, solving for a partial equilibrium model that results in the same changes in income tax revenue and tax incidence by income level as the government projected. The study finds that the income tax revision increases the average tax burden and reduces the progressivity of the tax-benefit structure. After incorporating these changes into the DSGE model, the study shows that the income tax revision has a positive impact on aggregate consumption and the total capital stock, leading to a 0.45 percent increase in GDP in the long run. However, the income tax revision worsens income inequality and reduces consumer welfare by 0.33 percent.