"Whether the burden of property holding taxes is higher or lower than in other cities is not the core issue. Only when the purpose and use of the taxes, the tax base, and where the revenue goes are consistent can the strengthening of holding taxes gain legitimacy."
Professor Lee Gwan-ok, an expert in urban development and dwelling policy at the Department of Real Estate, Business School, National University of Singapore, said this in an interview with ChosunBiz on the 24th, before the government announced its tax reform plan.
Lee, who conducted a study titled "Comparison of property holding taxes in major global cities" at the request of the Seoul Metropolitan Government, said it is hard to justify raising taxes on high-priced dwellings based solely on comparisons showing that Seoul's effective holding tax rate is lower than in major overseas cities. He said it must first be made clear whether a holding tax is a wealth tax, a punitive tax to deter speculation, or a policy tool for housing stability.
He emphasized that taxpayers must also be able to know where the comprehensive real estate tax is collected, which regions it is allocated to, and for what purposes it is used, in order to reduce resistance to taxes. The following is a Q&A with Lee.
— Why compare property holding taxes among cities, not countries?
"Even within Korea, there are big differences in dwelling prices between Seoul and non-Seoul areas and between the capital region and other regions. Residents' incomes and ability to bear taxes also differ. Rather than comparing only national averages, it is appropriate to compare the holding tax burden and taxpaying capacity (the economic ability to bear taxes) among cities with similar dwelling prices and income levels."
— What is the biggest difference between major overseas cities and Seoul?
"It is hard to find among the comparison cities a case like Korea, where holding taxes are divided into property tax and the comprehensive real estate tax, and then split again into local taxes and national taxes. Singapore is a city-state and has a different structure, but in New York, Los Angeles, London and Tokyo, holding taxes are local government taxes."
— Are the tax items and the use of revenue that important?
"Where taxes are spent is extremely important. In other cities, holding taxes are used to fund services residents directly use, such as public safety, education and daily conveniences. Korea's comprehensive real estate tax is different in nature. Seoul collects more than half of the nationwide comprehensive real estate tax, but the revenue is allocated to local governments nationwide in the form of real estate grants. From the taxpayer's perspective, it is hard to know which region and which services their taxes are used for. When the use of taxes is not visible, resistance to taxes inevitably grows."
— How are holding taxes levied overseas?
"Tokyo, New York and Los Angeles levy holding taxes by multiplying a single rate (a proportional rate) by the assessed base amount. Tokyo's standard rate for holding taxes, called the 'fixed asset tax,' is 1.4%, and Los Angeles caps the rate at 1% of the assessed value. New York applies different rates and assessment ratios by property type, but within the same type it applies the same rate. They do not apply a progressive tax with higher rates by bracket as Korea's comprehensive real estate tax does. Some places impose higher rates on high-priced dwellings at acquisition or transfer, but holding taxes are unrelated to dwelling price or the number of dwellings. In major overseas cities, holding taxes are strongly characterized as the expense for using local services."
— The government also seeks to shift the holding tax system to value dwellings more than the number of dwellings.
"If higher progressive tax rates are applied to high-priced dwellings, it becomes closer to a wealth tax than a holding tax. To change the tax system, the policy goals of the comprehensive real estate tax must be reset. Levying the tax based on the number of dwellings was intended to prevent one person's ownership of multiple dwellings from reducing others' opportunities to buy. Applying progressive rates based on total asset value differs in nature from the existing policy goals."
— The government says it is to curb the phenomenon of concentrating on "one smart home."
"It must first be explained why 'one smart home' is a problem. It is hard to block, with taxes alone, people with substantial assets and income from buying preferred dwellings in Seoul. A plan to levy higher holding taxes on non-owner-occupied dwellings could be considered. Singapore applies different rate schedules to owner-occupied and non-owner-occupied dwellings. It applies progressive tax rates to the annual rental value of dwellings, with higher rates on non-owner-occupied dwellings."
— Can raising holding taxes curb excessive home price increases?
"Because dwelling prices are determined by countless variables, it is not easy to isolate the impact of holding taxes on prices. New York and Los Angeles have seen sharp price increases despite high holding tax burdens. To tame prices by raising holding taxes, one must assume that many owners will put their dwellings on the market and supply will surge. In reality, that much inventory is unlikely to emerge. In the short term, transactions may slow or some listings may appear, but holding taxes alone are unlikely to change the long-term fundamentals of home prices."
— What should be improved in Korea's holding tax system?
"Taxes must be predictable. When the tax system is complex, uncertainty grows and taxpayers' acceptance falls. Korea's holding taxes are overly complex, and the benefits for owner-occupiers are relatively small. In this study, the nominal holding tax burden-to-income ratio for a New York owner-occupier with one dwelling was 7%, but it fell to the 5% range after various deductions. In the United States, property tax is included among state and local tax deductions and, within certain limits, is deducted from taxable income for income tax. Korea also needs to reflect owner-occupancy and taxpayers' ability to pay more precisely."