[Op-Ed] Korea’s Property Tax System at a Crossroads: Dividing the Pie or Growing It

The current top inheritance tax rate is 50%, the second-highest among OECD countries.

A biased structure heavily reliant on tax revenue from high-income earners requires reform.

Low-tax items such as consumption taxes, which are lower than the OECD average, should have their effective tax rates raised.

Korea’s property tax system is excessively burdensome and irrational, significantly hindering the economic activities of both businesses and individuals. The domestic property tax burden far exceeds the OECD average, and this tax system has gone beyond simple taxation to create a negative cycle across the broader economy.

An irrational property tax system inevitably distorts the economic structure and works in a way that undermines long-term growth potential. Therefore, now is the time for rational tax reform to address the structural problems Korea faces.

The current top inheritance tax rate stands at 50%, the second-highest among OECD countries. When the valuation premium imposed on largest shareholders is included, the burden becomes even heavier. Over the past several years, Korea’s property tax burden has surged, far outpacing the OECD average rate of increase. Recently, the government announced a policy to ease the top inheritance tax rate and raise the child deduction amount. However, simply changing tax rates—rather than adjusting the share of tax revenue from property taxes relative to GDP—is far from sufficient to solve these fundamental problems.

Excessive inheritance taxes make corporate control especially vulnerable. This is because the heavy tax burden during management succession undermines managerial stability and reduces long-term growth potential. In some cases, the valuation premium imposed on largest shareholders may even force the disposal of a substantial number of shares during business succession. This threatens managerial control and undermines corporate sustainability.

Holding taxes and capital gains taxes also pose problems. Among holding taxes, the Comprehensive Real Estate Holding Tax in particular has remained at a high rate since it was strengthened in 2018. Because this tax is levied on the same tax base as the property tax, it has even given rise to controversy over double taxation. Furthermore, the system raises multiple issues, including violations of tax egalitarianism, the principle of protection of property rights, and the principle of proportionality, demonstrating just how irrational it is.

In the case of the capital gains tax, it is dampening real estate transactions and reducing liquidity in the housing market. An excessive capital gains tax burden creates significant pressure at the point of asset sale, making the transfer and trading of assets themselves more difficult. This undermines the functioning of the real estate market and even saps vitality from the housing market.

When homeowners face a heavy tax burden compounded by rising interest costs, they are often left with no choice but to sell their homes or give up on buying one altogether. As a result, market transaction volume declines, and the housing market becomes more prone to distortion. Therefore, tax rates on property taxes—including inheritance taxes, holding taxes, and capital gains taxes—should be lowered, deductions should be expanded, and legal safeguards should be established to prohibit overlapping taxation on the same tax base, thereby enhancing the fairness and efficiency of the tax system.

Easing the property tax system must also be accompanied by reform of the biased structure that relies heavily on tax revenue from high-income earners. A society in which neither investment nor consumption takes place cannot continue advocating income redistribution indefinitely. Rather, effective tax rates should be raised on low-tax items such as consumption taxes, which are lower than the OECD average, so that a more rational balance among tax categories can be achieved.

The task before Korea is to foster constructive discussion on irrational taxation and thereby enhance the sustainability of the economy as a whole. In addition, breaking away from the share-the-spoils economic structure still being repeated today and raising the potential growth rate is the direction the Korean economy must take going forward.

Rationally adjusting the property tax system is not a one-dimensional measure aimed at rationalizing the irrational. It is, rather, a prerequisite and starting point for the Korean economy to achieve sustainable growth.

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Original title: [칼럼] 한국의 재산세제, 파이 나눠 먹기와 파이 키우기의 갈림길

Author: Su-hyeon U

Date: 2024-11-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=27031