Measures miss the mark

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Measures miss the mark


Hong Ki-yong

The government announced that, starting in 2016, it will tax people with two homes earning interest or other yields from lump-sum deposits on long-term jeonse contracts. Previously, owners of three or more residences were taxed on their rental incomes. Tenants, instead, will be given tax breaks in order to better identify how much homeowners earn from renting out properties.

In principle, all incomes are subject to taxes. But authorities should be more discreet in implementing housing-related taxes, taking into account the state of the real estate market and overall economic circumstances. The biggest problem with the government’s new set of real estate measures is that taxation interferes with the primary goal of improving the housing rental market. Overall, it is questionable how the measures will help stabilize a rental market with runaway rents and lack of supplies.

Of 1.36 million people that own more than one residence, 1.15 million have two. Their actions can greatly affect the housing market. As they now are now subject to tax on their rental incomes, they could demand higher rents from tenants to compensate for the extra tax. If not, some might even have to give up one of their units to avoid tax. Retirees living on rents will see less tax benefits and higher insurance rates because they will no longer be qualified for family support from offspring.

Because bigger burdens will inevitably spill over to tenants, the recovery of the real estate market could slow down or be thwarted altogether. Most tenants, in reality, won’t receive that much tax benefit from the new measures. The government emphasized tax deductions for tenants paying monthly rents to encourage more people to seek shorter-term rents, but the essence of the new measures lies more in applying effective tax levies on landlords. Of 15.76 million salary earners, 5.15 million have not fully complied with their tax duties as of 2012. Of them, 5.05 million earn less than 30 million won ($27,704) a year. The new deduction of monthly rental fees - available to tenants who earn 70 million won a year or less - won’t make much of difference to most of the working class.

Korea’s current tax code on rent income differs according to the number of houses people own and is therefore seriously flawed. A person owning a single house valued at more than 900 million won and those who possess more than three homes are subject to comprehensive tax rates regardless of how much they earn from rent. But a person owning two homes and earning less than 20 million won from rents can choose between a separate universal tax and a comprehensive rate. The current levy can be unfair and should be revised so that tax rates reflect the size of real income from rents. Taxation on owners of two homes should be deferred until the real estate market and economy pick up. The latest government measures missed the aim of fixing the imbalance in monthly and lump-sum rent supply and demand and stabilizing homes for the middle class because its focus was on rationalizing the housing-related tax system. Even if the government is justified in collecting taxes on any form of income, it should thoroughly study the consequences on homeowners and tenants before introducing new real estate measures so people can better understand and cooperate with public policies.

Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, March 15, Page 32

*The author is a professor at the University of Incheon’s business school.

BY Hong Ki-yong

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