The real estate mess
The controversy over the government’s program to rationalize the rental housing market is a good example. Its measures are under heavy fire. Poor administrative judgment seems to have killed a fledgling recovery in the housing market. Since the steps - particularly a new tax on rental income - were announced, critics claim housing transactions virtually came to a halt and home values fell.
Is this really true? The protests are mostly directed at a plan to levy taxes on monthly and long-term rents. Property owners are reportedly enraged by the increased tax burden.
The media, citing so-called real estate experts, hyped the controversy. The public is resisting the government’s rightful claim to tax income. Part of the blame lies in the president and the government’s disastrous revision of the tax code last August.
Let’s recall the events of last August. In its first year in office, the administration unveiled a revision in the tax code. Tax guidelines can epitomize a government’s philosophy of governance. It tells whom and how much it will tax and where it will spend the money. A tax code can, in fact, encapsulate all the president’s campaign promises. A slogan of ensuring economic fairness and equality could be made concrete.
The deputy prime minister in charge of the economy and the head of the tax office reported and explained tax revisions to the president and her senior secretaries. The actions of August were a joint effort of the president and her economic team.
But that package was discarded in just four days. After being criticized for increasing the tax burden on the working class, Park ordered her government to revise the plan from scratch. The revision, in fact, had been ingenious, reducing deductions and revising exemptions that would have resulted in generating higher tax revenues from higher-income groups. But because of the element of increasing the burden on the middle class, the plan was never to see daylight. The revision was scrapped and officials in the taxation bureau at the Ministry of Strategy and Finance were replaced.
Leadership can be undermined when it backs down as manifested in the resistance to the new real estate measures. There is nothing wrong with taxing rental income. The government should have been more prudent in its timing and tried to explain to the public more carefully in advance. Taxes on rental income could translate into higher rents and increase the burden on retired people living entirely on rental income. But that alone was not capable of suddenly freezing the property market.
The major point of the measures was to gradually move Korea’s real estate rental market away from jeonse, or lump-sum deposits to monthly rents, like in the West.
The criticism of the overall plan was overblown. If rises in property prices have stopped over the last two weeks, they may be merely seeing a correction after recent gains. Demand for housing complexes to be redeveloped has eased, but 85 percent of auction supplies of apartments in Seoul have been sold for the first time in four years. New apartment supplies have also been fully sold. There are still signs of recovery. It is too early to argue that the government policy has killed a revival of the property market.
Yet the government is wavering after just one week. It announced that it will exempt low-income landowners from income tax for two years.
The government should stop being so weak. It should take note that former Japanese Prime Minister Junichiro Koizumi went on TV almost every day to persuade the people of the need to privatize the nation’s postal service. If the president dithers at every resistance, she may not be able to push ahead with the more rigorous task of reforming public corporations and deregulation.
JoongAng Ilbo, April 10, Page 30
*The author is an editorial writer of the JoongAng Ilbo.
By Yi Jung-jae