[Choi Jun-young's Urban Pilgrimage] Cities and Taxes

Controversy surrounding taxes continues. The debate intensified as holding taxes, which combine property tax and comprehensive real estate tax, were raised as a means to stabilize housing prices, along with a significant increase in acquisition tax paid when purchasing a home. Increasing taxes related to owning or trading houses reduces the benefits of homeownership, leading to more listings on the market and stabilizing prices. On the other hand, imposing excessive burdens on housing, an essential good, can make life more difficult and potentially deepen an already sluggish economy.

Many People Living in a Small Area
Cities Serve as Valuable Sources of Tax Revenue

Taxes began to be collected as people formed communities and societies. Although the form of taxation evolved from in-kind contributions or labor to monetary payments, the continuous theme has been that members of society bear a certain level of burden to maintain the society. Looking back, human history is also a history of conflicts and disputes over who collects how much tax from whom and how it is used.

From the perspective of tax collection, cities are very advantageous places. Because many people live in a small area, it is easier and more efficient to collect taxes compared to rural areas. Additionally, cities accumulate a lot of wealth and have many high-income earners, making them valuable sources of tax revenue.

Among the taxes collected in cities, a representative one is the property tax imposed on owned assets such as houses. While paying property tax is taken for granted, there is something somewhat peculiar about it. The basic principle of taxation in modern society is "taxes are levied where income exists." However, property tax must be paid even though owning the property does not generate income. Acquisition tax can be broadly seen as a prepayment of several years' worth of property tax. Property tax is collected by local governments rather than the national government in most parts of the world because it fundamentally represents the cost of various administrative services provided by local governments.

Property Tax Mostly Collected by Local Governments
As a Cost for Various Administrative Services

From the perspective of local governments, which govern specific geographic areas, the most stable way to collect taxes is to target land and buildings that always exist within their jurisdiction. Therefore, taxes are levied based on these assets. Higher tax rates are imposed on owners of expensive land or houses, assuming they have a greater capacity to bear the burden.

When a city begins to grow, there are initially insufficient taxpayers and buildings, so local governments raise necessary funds by selling land. It may sound unfamiliar, but until the early 1990s, Seoul City also generated revenue by selling land it owned under the name of 'chebiji' (vacant land). Using these funds, the city paid public servant salaries and carried out projects such as road and subway construction. As more houses, buildings, people, and businesses settled through these projects, the city shifted from land sales to collecting property taxes to cover administrative costs. This is why local governments in China competitively engage in land sales and various development projects.

Choi Jun-young, Senior Advisor at Yulchon LLC

One argument that arises whenever the property tax on homeownership is debated is that "our country's property tax rates are too low." Compared to the United States, where more than 1% of the home's market value is collected annually as property tax, our rates are much lower, so raising them is not an excessive tax increase but a move toward international standards. A 1% rate on market value is quite significant. Applying this, an owner of a 1 billion KRW home would pay 10 million KRW annually in property tax, which is not a small burden.

High Property Tax Imposed on Rising Housing Prices
Concerns Over Rich-Poor Divide Between Regions

So why is there less controversy over property tax in the U.S., even with such burdens or higher rates? There are several reasons.

First, the entire or a portion of the paid tax is deductible from income, reducing income tax burdens. Second, although it varies by region, the tax base is the 'purchase price.' For example, if a house was bought 20 years ago for 50 million KRW and held continuously, the tax base remains 50 million KRW. One percent of that is only 500,000 KRW. Meanwhile, a new owner who bought the same house later for 500 million KRW pays 5 million KRW. Thus, the actual burden is not large for long-term homeowners. Third, most of the collected tax is used in the area where the house is located. Areas with high housing prices and heavy tax burdens invest these funds in infrastructure and especially schools. Because taxpayers can directly feel the benefits of their taxes, resistance to high rates is low. There are various aspects that cannot be understood simply by comparing tax rates.

Imposing high property taxes in line with rising housing prices can be seen as socially just. However, one must not overlook that this can exacerbate the rich-poor divide between regions. Areas with concentrated high-value homes can actively invest increased tax revenues to develop the region, while less affluent areas may lack investment capacity and become more neglected. In Seoul, to address this issue, the metropolitan government collects half of the property tax and distributes it evenly to 25 district offices to reduce disparities. This can be seen as a tax policy aimed at balanced development within Seoul.

Annual Holding Tax Collection in Korea at 16 Trillion KRW
Growing Debate Over Use as a Housing Price Stabilization Tool

Houses and buildings densely packed in cities symbolize enormous wealth. The combined value of land, buildings, and houses in Korea exceeds 1,000 trillion KRW. The holding tax, which includes property tax and comprehensive real estate tax, amounts to about 16 trillion KRW annually. Although this seems large in absolute terms, it is just over 0.1% in ratio. Recently, some have proposed raising holding taxes as a source for a national basic income, but sufficient social discussion has yet to take place.

No one pays taxes willingly, but taxes should not become a punitive tool either. It is unfortunate that taxes are used as a means to stabilize housing prices. It is time to shift the discussion to what level of taxation on urban houses and buildings is appropriate to maintain social stability.

This content was produced with the assistance of AI translation services.