Social consensus first

The government is considering shaving the tax on real estate acquisitions while raising that on property ownership. Taxes individuals and companies pay in acquiring property make up 40 percent of local government tax revenues. Yet the government overlooked this important factor in proposing revisions to the real estate tax code.

On April 1, the new government announced measures aimed at stimulating the real estate market. According to key construction data in May, licensed housing volume plunged 22.9 percent from the same month a year ago, construction was down 38.5 percent, and installment sales were down 21.5 percent. Confounded by the lack of effect from stimulus measures, some within the government are suggesting more changes in order to compensate for revenue losses.

The government has extended a cut in the housing acquisition tax every year since 2006, and that finally came to an end in June. Taxes on acquiring and registering real estate were combined in 2011 for convenience, making the total levy 4 percent on the purchase price. But the purchase taxes were actually levied at 2.5 percent until September 2006 and at around 2 percent until 2010. From 2011, 2 percent was levied on purchases of multi-household buildings where one residence is worth over 900 million won ($820,000), and 1 percent at or below that. To change makeshift breaks to a permanently low rate, authorities must contemplate some crucial questions first.

First, current property taxes are the result of extensive studies into what potential buyers can afford. While introducing an aggregate real estate tax and building property tax in 2005 and strengthening tax codes and transparency in real estate transactions based on market value in 2006, the government already pushed up taxes related to property ownership. If the acquisition tax rate is lowered by 1 percent, as proposed by the government, tax revenue would be reduced by 2.7 trillion won. Since revenue from property taxes amounts to 5.4 trillion won, the government would have to hike ownership tax rates by more than 50 percent to make up for the decreases. Would homeowners accept such a huge burden?

Second, the acquisition tax break did no more than adjust the trade period for potential buyers by leading to a fall in trade volume before the cut and a temporary increase before the rollback. The cut did not play a vital role in stimulating housing trade.

Third, who would want to own a house with a suddenly increased tax burden? The rule of thumb is that the heavier burden would ultimately fall on tenants through sharp hikes in rent prices. It would kill the feeble housing market instead of revitalizing it.

Fourth, a permanent cut to the acquisition tax could raise questions of fairness. Apart from housing, the tax on purchases of land, buildings or offices is maintained at 4 percent.

Fifth, the decision could generate a rift within the administration. The acquisition tax is a major revenue source for cities and provinces, just as property taxes are for cities and districts.Before adjusting the real estate tax code, the government must conduct thorough studies into these problems and come up with reasonable buffer measures. It must first discuss the issue with local administrations and build social consensus in order to prevent a failure of the policy.

The government must not dump tax problems on local governments while leaving the national tax base untouched to raise revenue for its policies. Some government offices still regard revenue from local governments as pocket money for the central government. If it wants to use the acquisition tax as a policy means, it must realign and restructure the national and local tax codes, just as the Germans have done, by combining income and sales taxes as common revenue for local and central governments.

Translation by the Korea JoonAng Daily staff.

*The author is the head of the policy research department at the Governors Association of Korea.

By Kim Seong-ho