The Korea Local Administration Review

Since only 50% of the additional amount of Local Share Tax distributed to a local government due to local tax underforecasting is adjusted two years later, a local government has an incentive to underforecast its local tax revenues. If every local government is induced to forecast its local tax revenues correctly, some governments may gain and others may lose. The reason is that the amount of fiscal shortage and adjustment ratio will change due to correct forecasting. Actually, the amount distributed to the upper-level local governments (Metropolitan City Governments) will decrease, but the lower-level local governments (Basic Local Governments) will earn an extra amount of Local Share Tax. To attain distributive justice of Local Share Tax, the correction ratio of the local tax forecasting gap should be increased up to 100%.