The government has grouped real estate-related reforms under the banner of 'tax reform for fair taxation.' The plan shifts the basis for the comprehensive real estate tax from property ownership to residency, sets tax rates based on property value instead of the number of homes owned, and raises the fair market value ratio from 60% to 80%. Once the reform is complete, an additional 2.1815 trillion won will be collected annually from the comprehensive real estate tax alone. Most of the actual tax increase of 2.343 trillion won, excluding the conversion of tax deductions into budgetary projects, will come from this one tax item.
The term 'fairness' is often used as a political slogan, but it can be assessed through specific criteria in taxation. This includes whether sufficient taxpayer consent has been obtained, whether the burden aligns with the benefits received, whether it corresponds to the taxpayer's ability to pay, whether the purpose and means are proportional, and whether taxpayers can anticipate their tax obligations. How fair is this reform based on these five standards?
The legitimacy of taxation cannot be established solely by majority rule. Swedish economist Knut Wicksell argued that broad consensus should be sought regarding both taxes and expenditures. James Buchanan, who later won the Nobel Prize in Economics, expanded on this idea, suggesting that constitutional constraints are necessary on the government's taxing power. Since taxes directly affect citizens' property rights, legitimacy must be achieved not only in outcomes but also in procedures.
The comprehensive real estate tax has been based on property ownership since its introduction in 2005. This reform will change that basis to residency. The basic deduction will be set at 140 million won for residents with one home and 90 million won for non-residents with one home, and the tax deduction linked to the length of ownership will also shift to a residency-based standard. Adjusting tax rates differs in weight from changing the basis of taxation. The former changes how much is paid, while the latter changes who pays more. To replace a standard that has been in place for twenty years, appropriate persuasion is necessary first.
However, there has been no public discussion, and the results of research projects have not been disclosed. The period for gathering opinions was just over two weeks, falling short of the 40 days stipulated by the Administrative Procedures Act. When altering long-standing standards, securing taxpayer consensus first is the starting point for fairness.
Next is the principle of benefits. Long-standing research in local finance has explained property taxes as payment for local public services such as schools, public safety, and roads. American economist Charles Tiebout described how residents choose their homes based on the combination of taxes and public services. The logic is that good local services are reflected in housing prices, and property taxes are a tax that shares part of that benefit.
Applying this standard to the current reform raises questions. The individuals who directly utilize local public services are those who live there. Homeowners who do not reside in their properties do not directly use schools or roads. The benefits of increased property values due to improved local conditions go to the owners, but the extent of that benefit is unrelated to whether the owner lives in the home. If the property is rented out, some of the increased tax burden may be passed on to tenants through higher rents. There is weak justification for imposing significantly higher tax burdens solely based on non-residency.
Consider an apartment valued at 1.5 billion won owned by a 60-year-old for ten years. If the owner lives in the apartment, the comprehensive real estate tax after the reform will be 110,000 won, while if they rent it out and live elsewhere, it will be 1.52 million won. Despite the same property, age, and length of ownership, the burden increases fourteenfold. The government calls this normalization, but an explanation of what principle justifies this is needed.
The same applies from the perspective of ability to pay. There is no basis for concluding that a homeowner who does not reside in their property has greater economic capacity than someone who does. Some may live in a less expensive home while renting out their own, and others may live elsewhere due to work, education, or caregiving responsibilities. The government's various exceptions for education, relocation, long-term care, and redevelopment show that non-residency is not necessarily a result of choice or privilege.
When considering ability in terms of income, the issue becomes clearer. Property taxes are levied even without cash income. For elderly owners with interrupted income, the ability to pay and the tax burden may diverge significantly. France imposes an income cap on its wealth tax on real estate for this reason. Our system lacks such cushioning mechanisms. In fact, the cap on the increase in tax burden from the previous year has been raised from 150% to 200%.
Proportionality must also be examined. The reform plan integrates the tax rate tables based on the number of homes into those based on property value. The direction is correct, but the issue lies in the fact that it was integrated using the higher tax rate table. Even someone with only one home may face a maximum tax rate of 5% if their taxable base is high. This exceeds France's maximum wealth tax rate of 1.5% by three times.
The differences extend beyond tax rates. France excludes mortgage loans from the taxable base, provides a 30% deduction for primary residences, and imposes caps on the combined tax burden with income tax. Our system lacks such provisions. If a property valued at 7 billion won is owned without residency, the combined property tax after the reform will reach 57.99 million won. Assuming a rental yield of 2% per year, this amounts to 41% of the pre-tax rental income. Rental income tax is separate.
The Constitutional Court also ruled in a 2008 comprehensive real estate tax case that failing to consider the circumstances of individuals who have owned a single residence for a long time is problematic. This was based on the notion that it could lead to excessive burdens relative to their ability to pay. This point remains valid today.
Finally, predictability must be considered. In his work 'The Wealth of Nations,' Adam Smith identified 'certainty' as one of the conditions for a good tax. It means that it should be clear who must pay how much and when, and that taxes should not be subject to government discretion.
Since its introduction, the comprehensive real estate tax has undergone nine revisions over the past twenty years. Strengthening and relaxing measures have alternated approximately every two years. This reform will also see tax rate tables change annually, and the fair market value ratio will shift from 60% to 70%, then back to 80%. The limits on tax deductions and special exemptions for long-term capital gains will also change over the years. Taxpayers will face different rules each year for the next several years. Moreover, the fair market value ratio, which influences tax amounts, is governed by an enforcement decree rather than law, allowing it to change without parliamentary approval. A system where taxpayers cannot predict their tax obligations cannot be deemed fair.
The fundamental direction for normalizing property taxes has been known for a long time. The authoritative tax reform report 'Merrill Review,' created by British tax experts led by Nobel laureate James Mirrlees, and the direction proposed by the OECD are not significantly different. The tax base should be broad, effective tax rates should be gradually increased, and taxes that hinder housing transactions should be lowered. South Korea ranks among the countries with the heaviest burden of real estate transaction taxes in the OECD.
This reform is nearly the opposite. It narrows the tax base and concentrates high rates. What the National Assembly should examine is not how much more tax revenue will be collected, but the principles upon which that burden rests. The fairness of taxation is determined not by whether it collects a lot or a little, but by whether the public can understand the criteria and reasons behind it.
Author's Major Background
▲ Ph.D. in Economics from Yale University ▲ Professor of Taxation at the University of Seoul ▲ President of the Korean Fiscal Society ▲ Former Research Fellow at the National Tax Research Institute
▲ Tax Analysis Officer at the National Assembly Budget Office ▲ Former member of the Local Regulatory Innovation Committee and the Special Committee on Fiscal Reform
* This article has been translated by AI.
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