[Editorial] Real estate tax reform plan fails to live up to expectations

Posted on : 2018-06-23 15:40 KST Modified on : 2018-06-23 15:40 KST
A real estate office in Seoul’s Jamsil-dong area has posted several leaflets about “urgent” apartment sales. (Yonhap News)
A real estate office in Seoul’s Jamsil-dong area has posted several leaflets about “urgent” apartment sales. (Yonhap News)

The holding tax reform plan presented on June 22 by a special financial reform committee under the Presidential Commission on Policy Planning (PCPP) failed to live up to expectations. Specifically, it did not contain anything to bring the declared values used as a basis for calculating assessment standards in line with the market price reality. This is a shortcoming the Ministry of Strategy and Finance will need to address when it decides on the administration’s final plan.

The committee suggested four possible scenarios for overhauling the comprehensive real estate tax. They involved incremental 10-percent increases in the fair market price percentage (currently 80 percent) used in addition to declared values (currently around 70 percent of market values) when calculating assessment standards, or various combinations of increases in the comprehensive real estate taxes (0.05–0.5 percentage points for housing from current levels of 0.5–20 percent; 0.25–1.0 percentage points for land from current levels of 0.75–2.0 percent for general aggregate holdings and 0.5–0.7 percent for separate aggregate holdings).

It could be seen as a step forward if the final plan does opt to increase both the assessment rate and the fair market price percentage. At that point, it would more or less restore the comprehensive real estate tax system to its Roh Moo-hyun administration-era levels after its loosening by the Lee Myung-bak government. The comprehensive real estate tax rate for housing during the Roh presidency stood at 1.0–3.0 percent.

A special financial reform committee under the Presidential Commission on Policy Planning (PCPP) announced its holding real estate tax reform plan on June 22. The committee held its first general meeting on Apr. 9. (provided by PCPP)
A special financial reform committee under the Presidential Commission on Policy Planning (PCPP) announced its holding real estate tax reform plan on June 22. The committee held its first general meeting on Apr. 9. (provided by PCPP)

But even if the tax rates are adjusted in the administration’s final plan, it is still an amendment of the law that will need to pass the National Assembly. The opposition’s cooperation is essential. The increase in the fair market price percentage could be achieved by amending the enforcement decree, but the actual effect of this in terms of higher taxes would be slight.

Plans to increase the declared value have been put on ice. That decision appears to reflect the potential backlash from taxpayers over rises in property taxes for housing and land not subject to the comprehensive real estate tax, along with acquisition taxes, inheritance taxes, and health insurance premiums.

To be sure, raising taxes is not a panacea. The transfer income tax for multiple home owners was also raised this past April. But we also need to consider that a low property tax burden encourages real estate speculation and hurts tax equity. A clear example of this is the 11 percent decline in comprehensive real estate tax revenues from 1.7 trillion won (US$1.5 billion) to 1.5 trillion won (US$1.35 billion) over the period from 2006 to 2016, even as the total amount of real estate assets was rising by 75 percent from 6.108 quadrillion won (US$5.5 trillion) to 10 quadrillion won (US$9 trillion).

South Korea’s holding tax burden (in terms of property and comprehensive real estate taxes) is also much lower than in other countries. According to Korea Institute of Public Finance figures, South Korea has an effective holding tax rate (the ratio of holding taxes to told real estate market value) of 0.16 percent in 2015 – less than the half the 0.33 percent average for the 13 comparable members of the Organisation for Economic Co-operation and Development (OECD). There certainly is room there for a hike.

The fact that the real estate market has been stabilizing downwards could feed opposition to a tax increase. But the tax system does need to be overhauled – as a matter of tax equity, if not economic fluctuations. Hopefully, the administration’s tax system overhaul plan will include a more realistic approach to declared value when it is announced around late July. It needs to distance itself from criticisms that the tax system favors “easy income” from land over earned income from working.

Please direct comments or questions to [english@hani.co.kr]

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