"Rapid Increase in Property Holding Tax Over the Past 4 Years... Need to Ease Comprehensive Real Estate Tax Amid Side Effects and Constitutional Concerns"

Korea Economic Research Institute, Report on 'International Comparison and Implications of Comprehensive Real Estate Tax'
Increased Tax Burden Expected to Lead to 'Tax Shifting' and More

[Asia Economy Reporter Kim Heung-soon] Amid the rapid increase in the proportion of real estate holding taxes under the current administration, raising concerns about side effects such as tax shifting, there has been a call to ease the comprehensive real estate tax, which is even facing constitutional concerns.

The Korea Economic Research Institute (KERI), under the Federation of Korean Industries, stated this on the 20th in its report titled "International Comparison and Implications of the Comprehensive Real Estate Tax." KERI analyzed that the proportion of real estate holding taxes relative to Gross Domestic Product (GDP) has rapidly increased, and that this proportion likely rose further in 2021 when both the comprehensive real estate tax rate and the fair market value ratio were raised simultaneously.

Increase of 0.44%p in Holding Tax Proportion from 2017 to 2021
Estimated to Surpass OECD Average Level
Sharp Rise Compared to Previous 7 Years’ 0.08%p

According to the report, the proportion of real estate holding taxes relative to GDP increased by only 0.08 percentage points (p) (from 0.7% to 0.78%) from 2010 to 2017 in a time series, but rose sharply by 0.44%p (from 0.78% to 1.22%) over the recent four years from 2017, when the current administration took office, to 2021. Accordingly, KERI estimated that this proportion has exceeded the average level of the Organization for Economic Cooperation and Development (OECD), which stands at 1.07%.

The report also analyzed that although government officials claim that 98% of the population is unaffected by the comprehensive real estate tax, the 2% of taxpayers are effectively household heads, and when considering tenants affected by this, the number of people influenced by the comprehensive real estate tax is much larger. Since incomes are limited, an increase in taxes inevitably leads to conversions to semi-monthly rent or monthly rent, and as the supply of Jeonse (key money deposit lease) decreases, Jeonse prices also rise, clearly indicating 'tax shifting.'

The report included an analysis that if the increased comprehensive real estate tax is passed on to tenants, it will increase the burden on lessees along with the distorted three lease laws, causing a chain reaction of negative effects in the Jeonse and monthly rent markets.

Furthermore, the report added that the rapidly increased tax burden from the comprehensive real estate tax may infringe on property rights under the Constitution and violate principles such as the prohibition of excessive restrictions. It explained that the rapid increase in tax burden due to the rise in official property price realization rates and fair market value ratios has greatly increased the possibility of excessive infringement on property rights, and that the phenomenon of having to sell homes to pay the comprehensive real estate tax is emerging, which could violate the principle of prohibition of excessiveness.

Im Dong-won, a senior researcher at KERI, argued, "The comprehensive real estate tax, which has rapidly increased the tax burden and raises concerns about side effects and unconstitutionality, requires measures such as lowering the tax rate, restoring the upper limit on tax burden from 300% to 150%, and adjusting the pace of official property price realization."

Only Two Countries Levy Real Estate Wealth Tax
Korea’s Tax Burden Heavier than France’s

According to the report, France’s 'Real Estate Wealth Tax,' newly introduced in 2018, is levied at progressive rates (0.5?1.5%) on real estate assets with a net value exceeding 1.3 million euros (approximately 1.73 billion KRW). The tax base is the net assets (market value minus debt), and as of 2020, more than half of taxpayers had a tax base below 1.8 million euros (approximately 2.4 billion KRW), with an average age of 69.

Senior researcher Im said, "Comparing France’s real estate wealth tax with Korea’s comprehensive real estate tax, the latter applies to three times as many targets and has a maximum tax rate up to four times higher. From an international perspective, it is unreasonable to impose a heavier tax burden than France, the only other country besides Korea that levies such a tax."

KERI emphasized that differences in tax burdens between countries are a key factor determining the movement of capital across borders, and that countries which imposed wealth taxes have abolished them due to side effects such as the outflow of labor and capital overseas.

Senior researcher Im pointed out, "Along with easing the comprehensive real estate tax, excessive transaction taxes and capital gains taxes should also be reduced to stabilize and revitalize the real estate market. Many real estate measures have set high transaction and capital gains taxes, causing transaction stagnation in the real estate market." In fact, KERI’s analysis showed that as of 2018, the proportion of real estate-related taxes relative to GDP was 3.66%, about 2.2 times higher than the OECD average.

Based on this, senior researcher Im emphasized, "The next government should learn from the failures of the previous Participatory Government’s real estate stabilization policies and the current administration’s real estate measures, and maintain consistency in real estate policies based on supply-demand stability rather than strengthening taxation or regulations."

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