[Why & Next]② Patchwork According to Regime Preferences... "Integrate Comprehensive Real Estate Tax into Property Tax"

Politicization of Real Estate Taxation
Introduced to Curb Housing Prices
Faces Strong Tax Resistance

"Real estate taxation has become too politicized."

[Asia Economy Reporter Lee Hyun-joo] On November 23 last year, at the National Assembly Planning and Finance Committee's Tax Subcommittee meeting room, a member of the Democratic Party of Korea said this. It was a comment made during a discussion on the Comprehensive Real Estate Holding Tax (종부세). In fact, the 종부세 has undergone patchwork revisions under every administration as part of real estate measures.

According to political circles on the 24th, the Roh Moo-hyun administration aimed to curb real estate speculation by raising holding taxes and property taxes. However, since property tax is a local tax and local governments can only reduce the decided tax amount by about half, it was analyzed that the expected effect would be difficult to achieve. Therefore, the Roh Moo-hyun administration decided to create a new national tax managed by the central government called the 종부세.

With the introduction of the 종부세, taxpayers first paid the low-rate property tax and then the 종부세 as a second tax, but initial resistance was not as strong as expected. At that time, there were few houses with a publicly announced price exceeding 900 million KRW, and the tax was imposed based on individual aggregation, so the number of taxpayers was not large.

Comprehensive Real Estate Holding Tax Introduced by Roh Moo-hyun Administration, Patchwork Measures According to House Prices

However, as house prices surged in 2005, patchwork measures on the 종부세 began. The Roh Moo-hyun administration expanded the 대상 (taxable) houses to those with a publicly announced price exceeding 600 million KRW and strengthened the requirements by imposing the tax on a household basis. The purpose was to curb rapidly rising house prices, but tax resistance grew mainly among long-term holders of one house per household. In 2008, the household aggregation rule of the 종부세 was ruled unconstitutional.

Having lost public support due to failed real estate policies, the Roh Moo-hyun administration handed over power after 10 years. With the entry of the Lee Myung-bak administration, policies to ease the 종부세 were introduced. The household aggregation method was changed to individual aggregation, and for one-house owners, the tax was applied only when the publicly announced price exceeded 900 million KRW, easing the criteria. Tax rates were also generally lowered. The Fair Market Value Ratio (the ratio applied to the publicly announced price when determining the tax base) was newly introduced at 80%, reducing taxes. The Park Geun-hye administration continued the same policy direction as the Lee Myung-bak administration.

However, under the Moon Jae-in administration, which entered amid the impeachment crisis of President Park Geun-hye, the 종부세 tax base was strengthened again. This was a measure to curb soaring real estate prices. In 2018, the Moon administration imposed a top 종부세 rate of 3.2% on owners of two or more houses in designated adjustment areas with rapidly rising prices, including all of Seoul and Sejong, and parts of Busan and Gyeonggi Province, and raised the tax burden cap from 150% to 300%. Additionally, a new tax base bracket of 300 million to 600 million KRW was created, increasing the tax rate by 0.2 percentage points to 0.7%.

However, as house prices continued to soar, in 2020, the 종부세 surtax rates for multi-homeowners were further increased. Owners of three or more houses and two houses in adjustment areas were subject to tax rates ranging from 1.2% to 6.0% depending on the tax base bracket. Corporations holding multiple houses were subject to the highest surtax rate of 6%.

As a result, the tax burden increased mainly for single-homeowners. The Moon administration eased policies by raising the additional deduction for one-house 종부세 from 300 million KRW to 500 million KRW in 2021 and introducing some exceptions, but faced strong tax resistance including successive constitutional lawsuits against the 종부세. At that time, Yoon Seok-youl, the People Power Party candidate, stated, "If I become president, I will completely review the 종부세."

In fact, the Yoon Seok-youl administration pursued 종부세 easing policies from its first year in office. With the passage of the supplementary budget bill last year, the surtax rates for multi-homeowners were abolished, and the publicly announced price threshold for one-homeowners was raised by 100 million KRW. The basic deduction amount was also increased again from 600 million KRW to 900 million KRW.

[Image source=Yonhap News]

Should the 종부세 be Integrated into Property Tax vs. Abolish 종부세 and Raise Property and Income Taxes

Experts agree that rather than the current 종부세 payment method, an alternative is needed to unify it into the property tax and adjust it by brackets.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "A first step is needed to revert the tax system that has risen over the past 3-4 years back to its previous state, and since there are many problems with the tax itself, a second step could be to propose unifying it into the property tax." Professor Kang Sung-jin of Korea University’s Department of Economics said, "The basis of taxation should follow global standards to maintain tax competitiveness," adding, "There is no need for Korea to have a special different taxation." Professor Kang also suggested alternatives such as raising property and income taxes.

However, it is also pointed out that in-depth discussions are necessary when integrating the 종부세 into the property tax. Since the 종부세 was originally created by splitting part of the local property tax, minimizing side effects that may arise from reverting this is essential. The National Assembly Legislative Research Office expressed concerns about ▲ widening fiscal disparities among basic local governments ▲ minimal improvement in the complexity of the local fiscal adjustment system ▲ potential increase in costs for securing personnel and building and operating IT systems.

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