[Free Speech] Punitive Comprehensive Real Estate Holding Tax Cannot Continue Like This

“Stop the predatory comprehensive real estate holding tax on owners of multiple homes.” This was the title of a post uploaded to the Blue House public petition board last November, which drew the support of some 16,000 people. Last year, 950,000 people were subject to paying the comprehensive real estate holding tax, a 37% increase in just one year. The amount assessed by the National Tax Service also rose sharply, from 387.8 billion won in 2017 to 5.7 trillion won over five years. The sudden surge in both the number of taxpayers and the amount of tax assessed in a single year left countless citizens bewildered. In the end, last November, around 100 taxpayers subject to the tax, along with corporations, submitted a petition requesting a constitutional review of the law, placing the comprehensive real estate holding tax once again before the Constitutional Court.

The comprehensive real estate holding tax (CRET) is levied on houses and land that are also subject to property tax. More specifically, it refers to a tax imposed on the amount by which the total officially assessed value of houses and land exceeds the deduction threshold.

The comprehensive real estate holding tax was first introduced in June 2005, enacted in the name of promoting tax equity and stabilizing the real estate market. While the purpose behind its introduction may sound plausible, 18 years later there remain many doubts as to whether it is in fact an effective tax. In addition, controversy over who should be subject to it and the standards by which it is imposed has never ceased, and multiple lawsuits have already been filed, including the one brought last November. Since the tax was first introduced in Korea, there have been as many as 19 Constitutional Court rulings related to it alone.

The biggest controversy is the issue of double taxation. Criticism on this point has existed since the tax was first introduced in 2005. The comprehensive real estate holding tax applies to houses and land, the same tax base used for property tax. Accordingly, one can say that two taxes are being imposed on the same item. Korean law does not explicitly state a blanket prohibition on double taxation itself, but the Constitutional Court has held that double taxation cannot stand because it violates the principle of no taxation without law, the principle of taxation based on substance, property rights, and the principle of equality.

Moreover, the comprehensive real estate holding tax has lost the clarity that a tax ought to possess. Its tax rates and tax standards change every year, only deepening public confusion. In particular, because the tax is imposed on an individual basis, changes in the underlying input values have caused errors in National Tax Service tax notices, at times triggering a flood of taxpayer objections. The tax system itself is also poorly designed: despite the existence of a statutory cap on tax burdens, there were taxpayers whose payments increased by roughly 50 times from the previous year.

Taxes should, in principle, be adjusted and established within a range that citizens can reasonably predict. But because the government has advanced unclear tax standards based on officially assessed land values set by the state, not only citizens but the government as well has, in the long run, failed to predict tax revenues accurately. In the end, the comprehensive real estate holding tax—constructed and raised at will last year—was misjudged even by the government itself, ultimately contributing to a record-high excess tax revenue of over 61 trillion won this year.

Above all, taxation must follow the principle of ability to pay. In other words, regardless of the benefits we receive from public services, taxes should be imposed at a level the taxpayer can bear. Comparing only last year and this year, the comprehensive real estate holding tax rate rose by an average of about 15% even for individuals owning a single home, while those owning two homes in regulated areas were forced to accept tax notices showing increases as high as 90%. Since the government plans to continue raising officially assessed values, this excessive increase is expected to continue going forward.

When one hears stories of retired elderly people looking into loans or having to move because they cannot afford the tax, one cannot help but question whether the principle of ability to pay is really being upheld in the comprehensive real estate holding tax. The tax is imposed on real estate holdings even when the taxpayer has no current income. Can it really be the role of taxation to treat citizens as potential speculators merely for owning real estate and impose punitive taxes on them? Imposing unaffordable taxes simply because people own housing, an essential good, will only fuel public resentment. In reality, concerns are also growing over tax resistance and tax avoidance resulting from this.

As public dissatisfaction with the tax has grown, Democratic Party leader Song Young-gil responded by saying, “98% of the public are not subject to it.” An evasive attitude that seeks to dismiss the controversy with fragmentary statistics can never solve the problem. Moreover, while those subject to the tax account for 2% of the total population, they amount to nearly 8.5% when measured against the number of households that own homes. This is by no means a negligible figure, and even if the number of affected people were small, is it really right to shut one’s ears to citizens raising concerns?

Now, 18 years after the introduction of the comprehensive real estate holding tax, its flaws continue to come to light one after another, and we should no longer remain bound by it. Merely fixing peripheral aspects of the system would be no more than pouring water into a bottomless barrel. In particular, if we are to resolve the continuing controversy over double taxation, what is urgently needed now is a sweeping overhaul of both the property tax and the comprehensive real estate holding tax in order to reestablish the principles of the tax system.

Juhyun Kim

Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 징벌적 종부세, 이대로는 안된다

Author: Ju-hyeon Kim

Date: 2022-02-25

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=9&idx=24561