[Insight & Opinion] Holding Taxes Should Not Be a Subject of Political Strife

[Asia Economy] There is probably no idea that has influenced the perspective on evaluating the efficiency of government policies as much as the economic theory of ‘rational expectations.’ The fact that expectations about the future affect the current decisions of economic agents such as households and firms has significant implications for economic policy-making. There is likely no choice that impacts households’ present and future as much as real estate transactions, and it is natural that expectations about future conditions, including government policies, are major determinants. In particular, property tax policies such as holding taxes have a great influence on the formation of these economic agents’ expectations.

Among real estate policies, there is probably no tax policy that becomes as big an issue in every administration as holding taxes. The current administration’s first tax reform plan includes changing the comprehensive real estate tax (종합부동산세) surcharge criteria for multiple homeowners from the current number-of-houses basis to the total housing price basis, while also partially easing the applicable tax rates. No policy is universally agreed upon.

While the multiple-homeowner surcharge system is said to prevent overheating in the real estate market, there are also claims that the proposed comprehensive real estate tax reform constitutes an unfair tax cut for multiple homeowners. Like the previous administration, the current government might also push policies unilaterally. However, if policies change with each administration, economic agents form expectations accordingly, and especially for medium- to long-term decisions such as housing, such volatility makes it difficult to expect any policy to be effective. This policy uncertainty causes market disruption and leads households’ choices into a deadlock.

Therefore, a consensus beyond political factions is necessary. Agreed-upon policies are more likely to be maintained even when administrations change, resolving uncertainty. Households can expect such agreed policies to be sustained over a long period and make rational housing transaction decisions.

The author believes there is ample room for consensus regarding holding tax policies. Whether based on the number of houses or housing prices, the policy intention to impose progressive tax burdens on multiple homeowners and asset owners is common to all administrations. Finding common ground rather than differences is the starting point for consensus.

There is also a need to simplify the holding tax itself. The holding tax can be simplified, and for owners of low-priced houses or long-term owners, income tax policies such as tax credits could complement it. The current holding tax policy is so complex that ordinary citizens, unless experts, find it extremely difficult to calculate.

Because the structure is so complicated, even for the same housing transaction, there coexist vastly different tax amounts depending on the method or household ownership structure, with loopholes for tax avoidance. Even if the methods are reasonable, such complexity creates vulnerable groups, which ultimately leads to unfairness. Whether paying more or less tax, nothing is more important in tax policy than fairness that everyone can accept.

A major factor determining the holding tax burden is the Fair Market Value Ratio (공정시장가액비율). This is the ratio of the publicly announced real estate price applied when determining the tax base, and under the current system, it is set by presidential decree considering market trends and fiscal conditions. There is considerable room for political considerations to be reflected, making it a focal point of political conflict. This too needs to be simplified into a predictable system from a medium- to long-term perspective. The increase or decrease of the Fair Market Value Ratio should be linked to objective indicators such as inflation indices, or an upper limit should be set on annual tax rate increases to ease tax burdens caused by rapid price rises.

The expectation psychology about the future has long become a reality beyond theory as a major determinant of economic agents’ choices. Real estate policies, including holding taxes, are no exception. Real estate policies should never be tools for votes or approval ratings in any administration. Beyond political factions, a sustainable medium- to long-term holding tax policy that everyone can accept is urgently needed.

Kim Gyu-il, Professor of Economics, Michigan State University

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