[Choi Jun-young's Urban Pilgrimage] Inflation and Property Holding Tax

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The 20th presidential election left behind many untold stories. While the main focus was on the narrow margin of 0.73 percentage points in the nationwide vote, the voting trends by region also attracted attention. Seoul stands out as a representative region. The voting advantage between the two candidates by district closely matched housing prices. There was a clear preference for candidate Yoon Seok-yeol in traditionally high-priced housing clusters such as the Han River area, the Gangnam 3 districts, and Yeouido, as well as in newly emerging New Town areas. Conversely, in regions traditionally considered Democratic Party strongholds, areas undergoing redevelopment and New Town projects saw weakened or even reversed support compared to the past. This was a result that could be called a real estate vote or class vote.

Various interpretations have been made regarding Seoul’s voting results, but the analysis that it was an expression of dissatisfaction due to increased taxes on owned homes is considered partly valid. In aiming to stabilize housing prices, the government mobilized tax policy as a key tool, increasing holding taxes such as property tax and comprehensive real estate tax on multi-homeowners, which intensified the burden and dissatisfaction among Seoul voters.

During the process, the government and ruling party, concerned about the sharp increase in burden, minimized it by reducing property taxes for single-homeowners and adjusting the tax brackets for the comprehensive real estate tax. However, because the scope was broad but shallow, households that benefited did not recognize it, while those whose burden increased were greatly shocked. The increased burden on multi-homeowners also included households owning many non-core, mid-to-low priced homes under the pretext of retirement preparation, which further fueled dissatisfaction. Ultimately, the active opposition and dissatisfaction of the groups facing increased tax burdens created voting trends different from the past.

It is natural and just to increase the tax burden on high-asset holders and those who benefited from asset price appreciation. However, this logic must be judged with consideration of changes in economic conditions. In an inflationary environment, asset prices continuously rise, and if there is no adjustment in tax brackets or rates?or if rates even increase?excessive tax burden increases inevitably occur.

Originally, holding taxes including property tax were concepts developed during the gold standard era when inflation did not occur. Since there was almost no price increase, once property tax was set, it was collected without major changes and was highly predictable. However, after the Great Depression, the gold standard was abolished, and since the 1970s, a managed currency system based on fiat money was established, changing the situation completely. Declining currency value and rising prices became inevitable. In an inflationary environment, asset prices such as housing and land must rise to maintain intrinsic value, and if taxes are imposed at a fixed rate accordingly, tax burdens increase faster than income, exacerbating the problem.

Tax collection on land and housing during inflation inherently involves the fundamental difficulty of setting a standard price. Price volatility is reflected relatively quickly, but tax bases or rates cannot change as fast, making political resistance to taxation inevitable. In Korea’s case, the annual official land price assessment used as a basis for taxation further amplifies this problem.

Although rapid inflation persisted in the 1970s, Korea recorded higher economic growth rates and imposed relatively low property tax rates, so tax burdens from asset ownership were not a major issue. However, in the US and Europe, tax burdens increased due to inflation exceeding economic growth and rising unemployment, becoming political issues and ultimately changing political landscapes. A representative example was California in the United States.

In California, land and housing prices continuously rose in the 1970s, causing property tax to skyrocket, which taxpayers did not anticipate and found difficult to bear. It was rare for income to increase enough to pay the increased taxes simply because asset prices rose. Property taxes on housing and land do not consider financial assets or liabilities and tax all real estate ownership, so the perceived burden inevitably grew.

This dissatisfaction expanded politically, and California enacted major tax reforms through a citizen initiative. The current principle of California’s property tax?based on purchase price and capped at 1%?emerged from this background. The successful 1978 citizen initiative was a victory for conservative forces emphasizing low tax burdens, leading to Ronald Reagan’s presidential victory in 1980 and long-term Republican governance.

Looking back now, if regulating multi-home ownership was essential for housing market stabilization, it would have been more effective to impose heavy acquisition taxes, which affect only home purchases, rather than property taxes that impact all homeowners. In fact, acquisition tax rates for multi-homeowners were later raised to as high as 12.8%, quickly calming the multi-home ownership trend. When a new government prepares tax reforms related to housing, the most important consideration should be creating a flexible system that accounts for inflation. Maintaining the rigid current tax system will inevitably cause problems to resurface.

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