Basic Report

The purpose of this study is to formulate elaborately strategies for successful decentralization of fiscal decentralization, which is being pursued as a national task by Moon Jae-in the government. We recognized the significance of fiscal decentralization as being enhanced the quality of life for local residents. In terms of institutional decentralization, fiscal decentralization should include institutional design of the allocation of functions, taxation and transfer of funds between central government and local governments, assuming the premise of transferring decision-making power to local governments to improve the quality of life of local residents. In this context, the policy suggestions of this study provide the direction of practicing the essence of fiscal decentralization to contribute to the improvement of the quality of life for local residents.
   We attempted to take strategic approach to the fiscal decentralization by analyzing current fiscal transfer system based on previous academic research and policy reports. In addition, we are trying to examine the effect of fiscal transfer from central government to local government in the first phase of fiscal decentralization policy established by Moon government’s national task in the earlier 2017, and therefore suggesting alternatives on the fiscal policy reform supposed to perform the second phase of fiscal decentralization policy in 2020.
   The main contents of the study are as follows. In Chapter II, we evaluate fiscal decentralization policies performed by previous government. Chapter III shows the effect of fiscal transfer policy in the first phase of fiscal decentralization by using simulation method. In Chapter Ⅳ, we reviewed the major issues of the second phase of fiscal decentralization policy proposed by the Ministry of Strategy and Finance. Finally, in Chapter V, we summarize the analysis result and suggest useful policy strategies to success fiscal decentralization policy through Moon’ government term.
   To analyze, we evaluate the previous fiscal decentralization policy by using the local revenue data for 20 years including local tax, local grant tax, national subsidy, and adjusted grant included in the budget revenue of local governments. Also, we examine the effect of the first phase of fiscal decentralization policy, whether or not increasing the local resources to local governments for each scenario and spreading the regional fiscal gap according to the increase of local consumption tax deriving the simulation method with Gini decomposition, by utilizing the latest revenue data including the 2018 and 2019 revenues of fiscal adjustment resources with Gini decomposition method.
   The main results and policy suggestions obtained by analysis are as follows:
   First, we found that the fiscal decentralization policies implemented by previous governments have continued to increase the amount of local revenue, but the effect of expanding local revenue was insignificant. In addition, although the degree of revenue decentralization of Korea was close to the average level of the peer nations compared with OECD countries, the status quo analysis implies the necessity of increase the taxable sovereignty to the local government are still considerable related to the regional economic growth rate.
   Second, the effect of the first phase of financial decentralization was limited to the expansion of local revenue sources by increasing local consumption tax by 10% point. Partially, this effect is significant only at capital metropolitan area. In non-capital area, local tax revenues decreased due to the trade-off relationship with the national function’s devolution to the local government without transferring fiscal resources to the local government (about 3.6 trillion Won). This result implies the limited effect of the first phase of fiscal decentralization policy because the central government struggles with local revenue expansion up to 30% of nation-wide tax revenue without transferring fiscal autonomy to local government.
   Third, we review the issues reviewed by the Ministry of Strategy and Finance and argue the validity of the “(provisional) local decentralization share tax” by using the simulation. The simulation analysis provides the effect could be significant only when transferring approximately 65 trillion Won resources to local government, which could be replaced current ordinary local sharing grant system. Additionally, the raise of local consumption tax and local income tax is necessary to consider it as a better alternative that transfer any other national taxes to local taxes.
   Fourth, to establish effective strategy for improving fiscal transfer system in Korea, we propose a two-track strategies implement of the second phase of fiscal decentralization policy at 2020. While we approach “formal decentralization strategy” aiming at the ratio of the current national tax and local tax 7: 3, we approach “real fiscal decentralization strategy” improve the quality of life of residents by enhancing the accountability of local finance.
   In formal fiscal decentralization strategy, we pointed out the limitation of the effect of “(provisional) local decentralization share tax” by reviewing it both theoretically and empirically. In addition, in order to achieve fiscal decentralization policy goal, we suggest 1) the necessity of the increase of local consumption tax and the increase of local income tax instead of transferring national tax to local tax, 2) the improvement plan for ordinary local share grant and adjusted grants to the city, county, and district level. Likewise, in real fiscal decentralization strategy, we propose the alternative strategies as follows; 1) the establishment of local consumption sales tax as a local tax identity shaped by local tax principle that local government levies their own authority. In the short term, current allocation system needs to improve by using consumption index and reforms it other fiscal transfer systems with ordinary local sharing grant and adjustment grant to the city, county and district level, 2) the consideration of the increase of local income tax rate necessary to expand the local tax resources, which gradually introduce from the urban area with a large population, and then expand the strategy to small and medium cities and county areas. 3) the elaboration of the option to increase taxable sovereignty to local government, especially local resource facilities tax and local leisure tax as a local discretionary tax. 4) furthermore, the reform of ordinary local share grant system by improving current adjustment formula system.