There is no doubt adjusting tax rates is a tricky task. If the rates are too high, the burden on companies and households will increase disproportionately in a way that can undermine economic activity. If the rates are too low, the government may struggle to secure enough funds for welfare and other essential state projects.
As for South Korea’s tax system, taxes are too high on both companies and households. In particular, a growing number of middle-class households are hit by burdensome taxes simply because they own a house or two, and not for speculative purposes but rather because their family lives in them.
A prime example is the so-called comprehensive real estate tax. The scheme was introduced in 2005 to keep speculative purchases of properties in check amid the rapid rise of housing prices in past decades.
When the peculiar tax system was introduced, the government at the time said it would affect only a small number of rich people holding multiple homes -- apparently beyond the level of normal house ownership.
The tax is imposed on those holding multiple homes with their combined state-assessed value exceeding 600 million won ($452,000). For single-home owners, their taxation base is set at 1.1 billion won.
For starters, the standard for taxation base has invited a slew of disputes. The favorable tax rate applied to single-home owners may be understandable, but there are many households which have two houses -- usually an extra house for rental income during post-retirement period -- but their combined value is lower than 1.1 billion won. In other words, multiple-home owners are at a disadvantage in terms of the taxation system.
Another big hole in the comprehensive real estate tax is that it failed to reflect the changing prices of houses in Seoul and other major cities. When the tax scheme was introduced, the number of people with houses worth over 600 million won was estimated at around 100,000. Back in late 2007, the government announced that only 2 percent of the nation's 18.5 million households would be subject to the tax.
But such a forecast was shamefully incorrect. After housing prices continued to soar in the following years, the number of homeowners who had to pay the comprehensive real estate tax reached 1.22 million this year, marking a whopping fourfold growth from 2017. Home and landowners are expected to pay comprehensive real estate tax totaling 7.5 trillion won, in addition to other property taxes.
The underlying reason behind the explosive growth of affected taxpayers is that the state-assessed price value of homes -- the yardstick for levying the comprehensive real estate tax -- has continued to soar in line with the rise of the actual market value.
On Wednesday, the Ministry of Land, infrastructure and Transport unveiled a plan to keep the state-assessed house prices to the 2020 level, equal to 69 percent of the actual market price, down from 71.5 percent this year.
The ministry also said it would ditch the road map in which the state-assessed prices would steadily be raised to 90 percent of actual market prices by 2030. The road map, set by the previous government under President Moon Jae-in, came under criticism since it would put burdensome taxes on an increasing number of homeowners who do not have any speculative purposes.
This is a belated move, but it is the right one. This year, 22.4 percent of homeowners in Seoul are subject to the comprehensive real estate tax, which clearly illustrates the problems with the scheme originally designed to affect only a small number of rich people. Complaints from angry homeowners who cannot afford to pay the tax are on the rise. Worse, the toxic mix of rising interest rates and the housing market hit by a downturn is hitting homeowners in their 30s and 40s, who took out loans to buy houses.
The new policy will relieve some pain from homeowners, but the government should work harder to fix the flawed tax system by helping to pass a proposed revision of the tax policy, which is now stuck in the National Assembly.