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[EDITORIALS]Why taxes could backfire

Published: 06 Jan. 2003, 00:23

Last week's announcement is probably Seoul's final card to play to rein in real estate speculation. The gist of the new plan was that the government would name areas with spikes in housing prices as "speculative areas." There will be big effects on a seller's tax liability, especially because the government said taxes on home sales in those areas would be based not on the standard price but the market price. Seoul also said it would levy capital gains taxes there based on the market price, rather than the standard price, and impose surcharges of up to 15 percent. These measures will no doubt have a short-term effect on dragging down the price of housing in the popular Gangnam district of southern Seoul. But the latest steps are also perhaps more a stop-gap, arbitrary measure that might run into a taxpayers' revolt.

In particular, the plan to slap extra capital gains taxes on sales of apartments whose price exceeds 600 million won ($475,000) is controversial. Many medium-sized apartments in Gangnam -- those of 100 to 132 square meters -- already exceed that price, subjecting their owners to punitive taxes even if they only own one dwelling. The new plan is a change from the current practice of not levying capital gains taxes on households that own one house, or the former, temporary exemption from taxes for owners of two or more apartments.

We also question how effective the measure would be if an apartment is adroitly sold or purchased just below the 600 million won-level -- on paper, at least.

Capital gains taxes on "luxurious" 600 million-won apartments must be applied with discretion to fight speculation, not to ensnare all such home owners. Otherwise, tax evasion will be rampant. The government must also be careful about how it tries to fight speculation. If there is no increase in the supply of housing in Gangnam, people will pay higher prices despite the hefty taxes. A better approach would be to levy a heavier tax on illegal speculative transactions in homes than on those who own only one, and to make the real estate market function as it should. From that principle, the government should think again.