Controversy Over the Recent Comprehensive Real Estate Holding Tax Act Revision and Immediate Policy Challenges

Legislative Policy Issue Report No. 3

Issues and Liberty

2022.12.09.

1. Comparison of the Main Contents of the Government and Democratic Party’s Comprehensive Real Estate Holding Tax Act Amendment Bills

Recently, the National Assembly has been engaged in final negotiations between the ruling and opposition parties over budget-related bills, including the so-called three major tax law amendment bills covering the Comprehensive Real Estate Holding Tax (hereinafter “CREHT”), corporate tax, and income tax. The statutory deadline for passing the 2023 budget bill, December 2, has already been exceeded by more than six days. Among these, the CREHT has gone through repeated controversy and fluctuation over roughly 17 years since it was created in October 2003 under the Roh Moo-hyun administration and first imposed in 2005. Following the Moon Jae-in administration’s repeated failures in real estate policy, public support for easing the CREHT has grown amid excessive tax burdens caused by rising officially assessed housing prices and a simultaneous downturn in the real estate market. Accordingly, on September 1, the government submitted a partial amendment bill to the Comprehensive Real Estate Holding Tax Act (Bill No. 17158) to the National Assembly’s Strategy and Finance Committee, where it is currently under review and deliberation. The key contents of the government’s amendment bill may be summarized as follows. First, it raises the basic deduction threshold for the tax base from KRW 1.1 billion to KRW 1.2 billion for single-home owners and from KRW 600 million to KRW 900 million for multi-home owners, thereby sharply reducing the number of taxpayers. Second, it abolishes heavy surtax treatment for multi-home owners and lowers tax rates. Third, it reduces the cap on tax burden increases to 150 percent. Overall, the bill moves in the direction of substantially easing the CREHT.

If the government’s amendment bill is passed, tax revenue is expected to decrease by KRW 1.4 trillion in 2023 and by about KRW 1.99 trillion annually from 2024 onward. The number of taxpayers for the housing portion is also projected to fall by nearly half, from 1.22 million to 660,000. By contrast, the Democratic Party’s amendment bill to the Comprehensive Real Estate Holding Tax Act (Bill No. 17031), sponsored by Representative Seonghwan Kim, provides for 1) raising the taxation threshold for multi-home owners to KRW 1.1 billion, the same as for single-home owners, 2) lowering the tax rate on tax bases of KRW 600 million or less for owners of three or more homes (or two homes in designated adjustment areas), and 3) raising the lower limit of the fair market value ratio to 80 percent. It contains both tax relief and tax-tightening measures, and because it is expected to reduce tax revenue by only about KRW 194.2 billion per year, it appears unlikely to produce any meaningful easing effect in practice. This report aims to analyze recent trends in the CREHT and the problems with the current Comprehensive Real Estate Holding Tax Act, and to explore the proper direction for reform.

2. Recent Trends in the Comprehensive Real Estate Holding Tax and the Rapid Expansion of Taxable Subjects in the Seoul Metropolitan Area

◩ Over the past six years, housing CREHT revenue has risen tenfold, while both the number of taxpayers and the tax burden per person have increased about fourfold

Looking at trends over the past six years, including the five years of the Moon Jae-in administration, in the housing portion of the CREHT targeted by the current government amendment bill, the number of taxpayers rose sharply from 332,000 in 2017 to 1.22 million in 2022. The share of taxpayers relative to all housing owners also increased nearly fourfold, from 2.4 percent in 2017 to 8.1 percent in 2022. Total tax revenue increased about tenfold, from KRW 390 billion in 2017 to KRW 4.1 trillion in 2022, with only a roughly KRW 300 billion decline under the Yoon Suk Yeol administration due to expanded deductions for elderly single-home owners and long-term holders. Meanwhile, the average CREHT burden per taxpayer rose more than fourfold, from KRW 1.169 million in 2017 to KRW 4.73 million in 2021. In 2022, under the Yoon Suk Yeol administration, it fell significantly to KRW 3.363 million.

◩ As of 2022, more than 22 percent of housing owners in Seoul (more than 2 out of 10) are subject to the CREHT

As of 2022, the number of CREHT taxpayers in the Seoul metropolitan area stood at 584,000 in Seoul, 39,000 in Incheon, and 338,000 in Gyeonggi Province, totaling 961,000, which accounts for 78.8 percent of all 1.22 million taxable individuals nationwide. In Seoul alone, 22.4 percent of homeowners were subject to the CREHT, while 13.4 percent of homeowners across the entire metropolitan area were liable for the tax. This means it is no longer appropriate to describe the CREHT as a tax applying only to the top 2 percent or 4 percent of high-asset individuals, as was once claimed. In other words, both the amount of CREHT imposed and the scale and scope of taxable subjects have increased excessively and rapidly over the past six years.

3. Analysis of the Problems with the Existing Comprehensive Real Estate Holding Tax Act

◩ No effect in curbing real estate price increases

The original stated purposes of introducing and strengthening the Comprehensive Real Estate Holding Tax Act were broadly 1) stabilizing real estate prices and 2) improving tax equity and redistribution. However, the tax has first of all been found to have no actual restraining effect on real estate prices. According to a study by Choi Seungmoon et al. (2018) of the Korea Institute of Public Finance, an analysis of the effects of property holding taxes on housing prices showed that while housing price growth slowed when the introduction of the CREHT was being discussed, after the system was actually introduced it had no significant effect on housing price growth in Seoul or on apartment price growth. Instead, interest rates were found to have a stronger effect on actual housing price increases. [Figure 2] below shows changes in the real estate sales price index nationwide and in the metropolitan area over the past 10 years: prices rose steadily and only began to decline after 2021, due to the Bank of Korea’s rapid interest rate hikes beginning in 2022. This demonstrates that the Moon Jae-in administration’s strengthening of property holding taxes for the sake of real estate price stabilization has failed.

◩ No income redistribution effect; rather, the CREHT is regressive for low-income and elderly households

Second, the CREHT does not improve tax equity or produce redistribution effects; rather, it has been regressive for low-income and elderly households. According to two recent studies by Professor Myeongho Park (2019) and Professor Myungjae Sung (2022), analyses of the income redistribution effects of property tax and the CREHT show that even strengthening taxes on asset holdings makes it difficult to expect any income redistribution effect. On the contrary, because of the progressivity of asset holding taxes, they may even produce regressive or negative income redistribution effects. This is because large numbers of elderly households that own homes but have retired and have little income were included among those subject to the CREHT.

◩ Increased CREHT burden may be passed on to tenants and harm the jeonse and monthly rental market

The CREHT burden per taxpayer has steadily risen from KRW 1.17 million in 2017 to KRW 3.36 million in 2022. If this increased CREHT burden operates in conjunction with the distorted “three rental laws,” there is a very high likelihood that the burden will be passed on to tenants, thereby causing chain reactions that adversely affect the jeonse and monthly rental market (Lim Dongwon, 2021). Combined with the Bank of Korea’s high-interest-rate stance, landlords may shift to semi-jeonse or monthly rent, and reductions in jeonse supply may lead to higher jeonse prices, raising concerns about “tax shifting.” Indeed, monthly trends in semi-jeonse transactions in Seoul from 2018 to 2022, based on data from the Seoul Real Estate Information Plaza, clearly show an expansion of semi-jeonse arrangements.

◩ The existing CREHT Act violates the principles of ability-to-pay and proportionality

The current excessive CREHT violates the principle of ability-to-pay, which requires fair taxation in accordance with taxpayers’ capacity to bear the burden, due to heavy surtax treatment for multi-home owners, burdens on low-income elderly households, and progressive holding taxes. Imposing taxes up to ten times higher on multi-home owners than on owners of homes of the same value fails to take taxpayers’ actual economic capacity into account. For this reason, since 2011 deductions of up to 80 percent have been applied to elderly single-home owners and long-term holders, but these measures remain insufficient. In addition, property holding taxes are fundamentally progressive taxes on unrealized gains. The more than tenfold increase in CREHT revenue over the past six years, along with the nearly fourfold increase in the scale and scope of taxable subjects, demonstrates the tax’s excessively punitive character and at the same time proves that it violates the constitutional principle of proportionality.

4. Immediate Policy Task for Amending the Comprehensive Real Estate Holding Tax Act: Passage of the Government Bill in Its Original Form Within This Year

The government’s amendment bill to the Comprehensive Real Estate Holding Tax Act currently being discussed by the National Assembly’s Strategy and Finance Committee is evaluated as moving in a direction that can substantially resolve the problems of the existing law, including excessive burdens that violate the principles of ability-to-pay and proportionality, by raising the basic deduction amount for single-home and multi-home owners, abolishing punitive surtax rates for multi-home owners, and adjusting the cap on tax burden increases (unifying it at 150 percent, effectively halving it). In particular, revision is needed so that taxation conforms to the principle of ability-to-pay, under which taxes should not exceed the taxpayer’s capacity to bear them. Accordingly, the government’s amendment bill, which is undergoing repeated final negotiations in the Strategy and Finance Committee, must be passed within this year in its original form. At the same time, in order to balance asset taxation and revitalize the real estate market, reductions in capital gains tax and acquisition tax should also be implemented.

◩ References

∙ Myeongho Park (2019), “An Analysis of the Income Redistribution Effects of the Reform Plan for the Housing Portion of the Comprehensive Real Estate Holding Tax,” paper presented at the 2019 Joint Conference of Economic Associations.

∙ Myungjae Sung (2022), “Analysis of Redistribution Contributions Through the Income Redistribution Effects of Property Tax and Elasticity Factor Decomposition,” Korean Journal of Public Finance, Vol. 15, No. 2.

∙ Dongwon Lim (2021), “International Comparison of the Comprehensive Real Estate Holding Tax and Its Implications,” Korea Economic Research Institute (KERI) Brief 21-07.

∙ Partial Amendment Bill to the Comprehensive Real Estate Holding Tax Act, Bill No. 17031, 2022.08.26, sponsored by Representative Seonghwan Kim.

∙ Partial Amendment Bill to the Comprehensive Real Estate Holding Tax Act, Bill No. 17158, 2022.09.01, Government.

∙ Seungmoon Choi and Sanghwa Shin (2018), “Analysis of the Tax Burden and Economic Effects of Property Holding Taxes,” Korea Institute of Public Finance Research Report 18-06.

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Original title: 최근 종합부동산세법 개정 논란과 당면 대응과제

Author: Center for Free Enterprise (CFE)

Date: 2022-12-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=issue&pn=2&idx=25169