Does tax simplification enhance utilization and equity? Evidence from investment tax credits in South Korea

Abstract

Tax complexity remains a persistent barrier to compliance and the full use of incentives. Global reforms aim for structural simplicity, but empirical evidence on their effects regarding tax distribution and burden is sparse. To lower compliance costs, the Korean government consolidated fragmented investment tax credit provisions into a single provision in 2018. We examine whether simplifying tax credit provisions increases tax credit utilization and promotes tax equity. We draw on 30,075 firm-year observations from administrative tax returns covering 2015–2019. We apply a DID design to estimate the reform’s effects on ETRs, tax credit utilization, and equity. The treatment effect is measured by a firm’s prior experience with tax credits. We measure horizontal equity by the CV ratio and vertical equity by the Reynolds‑Smolensky, Kakwani‑Progressivity, and Suits indices. We find that tax credit utilization increases significantly after the simplification and is linked to lower ETRs. The effect is larger for firms with greater prior experience with tax credits, suggesting the simplification lowers information costs. Horizontal equity improves due to increased access to tax credits among lower-bracket firms. Vertical equity does not improve and, in some cases, declines as high-income corporations exploit the simplified provisions more aggressively, leading to a regressive redistribution effect. Structural simplification advances administrative efficiency and horizontal equity. Meaningful improvements in vertical equity, by contrast, require additional reforms, such as adjustments to deduction rates and expansions of eligible assets.