Welfare Effects of Corporate Tax Policy and Optimal Corporate Tax Rates by Industrial Sectors in Korea

The purpose of this paper is to show the relation between corporate tax and cost of capital and then examine the welfare effects of corporate taxes to find the optimal corporate tax rate by industrial sector. For this purpose, effective tax rate formula will be examined and simple CGE model will be built. We will also apply the model to the case of Korea and conduct simulation analysis. We will then analyze the effects of the corporate tax to find the optimal level of corporate tax rate by industrial sector. This study shows that welfare level of Korea depends on economic structure and corporate tax rates for companies. It also shows that optimal corporate tax rate doesn't have any particular patterns. When we analyze the optimal corporate tax rate, we applied within 1% higher tax revenue condition to the alternative cases. Compared with present corporate tax rates, optimal corporate tax rate for SMCM is 1% lower than base case. In addition, optimal uniform corporate tax rate is 20.71% for four sectors.