The government has grouped real estate-related reforms under the title 'Tax Reform for Fair Taxation' in its latest tax reform plan. 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 finalized, 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 single tax item.
The term 'fairness' is often used as a political slogan, but it can be assessed through specific criteria in taxation. These include 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. This means that taxation, which directly affects citizens' property rights, must be justified not only by outcomes but also by procedures.
Since its introduction in 2005, the comprehensive real estate tax has been based on property ownership. 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 duration of ownership will also shift to a residency-based standard. Adjusting tax rates and changing the basis of taxation are not equivalent; 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.
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 portion of the cost of those benefits.
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 benefit from schools or roads. While the increase in property values due to improvements in the area benefits the owner, the extent of that benefit is unrelated to whether the owner lives in the home. If the property is rented out, part 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 who has held it for ten years. If they live 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. The same property, same age, and same duration of ownership result in a fourteen-fold difference in tax burden. The government calls this normalization, but it requires an explanation of what principle makes it normal.
The same issue arises from the perspective of ability to pay. There is no basis for assuming that a homeowner who does not live 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 reside 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 always a matter of choice or luxury.
When considering ability in terms of income, the issue becomes clearer. Property taxes are levied even without cash income. For elderly property owners with interrupted income, the mismatch between ability to pay and tax burden can be significant. France imposes an income-based cap on its wealth tax on real estate for this reason. Our system lacks such buffers. In fact, the cap on year-over-year tax burden increases has been raised from 150% to 200%.
Proportionality must also be examined. The reform plan consolidates the tax rate table based on the number of homes into one based on property value. The direction is correct, but the problem lies in the fact that it was consolidated using the higher tax rate table. Even a person 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 mechanisms. 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% annually, this represents 41% of the pre-tax rental income. Rental income tax is separate.
The Constitutional Court also ruled in a 2008 case regarding the comprehensive real estate tax that failing to consider the circumstances of individuals who have held a single residence for a long time for residential purposes is problematic. This was based on the notion that it could impose an excessive burden relative to ability to pay. That point remains valid today.
Finally, there is the issue of predictability. In his work 'The Wealth of Nations,' Adam Smith identified 'certainty' as one of the conditions for a good tax. It should be clear who pays, how much, and when, and 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 enforcement regulations rather than law, allowing it to change without parliamentary approval. A system where taxpayers cannot predict their tax obligations cannot be considered 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. Our country ranks among those 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 can be collected, but the principles on 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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