Intergovernmental Distribution of VAT Revenue in Korea: Local Consumption Tax

In Korea, local consumption tax (LCT) has been established as a form of VAT revenue share in 2010. LCT takes 5% of the national VAT revenue as the financial base and distributes it to the local governments based on the regional sharing ratio of private final consumption expenditures (vertical equity) and weighting system to mitigate regional financial disparity (horizontal equity). This paper first evaluates current LCT distribution in terms of both equities, suggesting that new distribution indices be needed to satisfy both goals. Before producing them, by reassessing the status and the goal of LCT, this paper suggests LCT as a new local transfer, not a local tax, should pursue another goal, the correspondence between production and incidence of regional value-added which is VAT resource and ultimately LCT base, because its interregional migration is substantial in Korea. Based on such status and goals, new distribution indices are suggested and the findings are evaluated.