Causes and Tasks of Tax Revenue Estimating Errors

Published on Aug., 16, 2023
Published by Tax Policy Analysis II Division

    Recently, a widening disparity between national tax revenue projections and actual settlements (hereinafter referred to as "tax revenue estimating errors") has emerged as a pressing issue in fiscal management. In 2021 and 2022, despite the challenges posed by the COVID-19 pandemic, an unexpectedly rapid economic recovery and brisk asset markets, including real estate, resulted in positive tax revenue estimating errors of 61.3 trillion won and 52.6 trillion won, respectively, compared to the main budget. However, substantial tax revenue shortfalls are projected in 2023 due to a sharp slowdown in global economic growth and trade volume from the second half of 2022.
   Analyzing the historical trends in tax revenue estimating errors reveals that the absolute value of Korea's tax revenue estimating error rate has been decreasing since the 1970s. However, when accounting for economic fluctuations, the relative error rate has been on the rise since the 2000s. Looking at specific tax categories, errors in estimating corporate income tax and capital gains tax on individual income have been the primary contributors to the recent expansion of tax revenue estimating errors. This phenomenon can be attributed to changes in the tax structure, resulting in a higher proportion of highly volatile taxes such as corporate income tax and taxes on the asset transactions and withholding. Furthermore, the diversification of revenue patterns across income classes and industries, resulting from a deteriorating income distribution structure, has intensified the volatility in the tax revenue growth rate.
   Significant tax revenue estimating errors have adverse effects on fiscal transparency and efficiency. Excess tax revenue can lead to a long-term increase in fiscal spending, resulting in fiscal management issues, such as a growing deficit bias and reduced adaptability to economic fluctuations. This report aimed to identify areas for comprehensive improvement by examining the characteristics and causes of tax revenue estimating errors, covering aspects including tax revenue forecasts, economic projections, governance, and fiscal management.