Property taxes should rise only after transaction taxes fall

Kim Woo-cheol

The author is a professor of the Department of Taxation at the University of Seoul and a member of the Reset Korea economic subcommittee.

Korea’s real estate tax system is unusually political by international standards. Whenever administrations change, the tax code swings sharply in the opposite direction. The comprehensive real estate holding tax introduced under the Roh Moo-hyun administration was later targeted for abolition by the successive Lee Myung-bak government. The heavier tax burden imposed under Moon Jae-in was later eased by the Yoon Suk Yeol administration. The M-shaped trajectory of property taxation reveals that ideology and political currents, rather than sound tax principles, have long dominated the system.

The cost has always fallen on ordinary citizens. The problem is not simply whether taxes are too high or too low, but that the structure itself is distorted. Property taxes cannot be normalized unless they are redesigned together with transaction taxes.

The Lee Jae Myung administration has pledged not to control housing prices through taxation. The omission of the fair market value ratio from the latest tax revision proposal was initially seen as evidence that pragmatism had prevailed over ideology. Yet expectations quickly faded. Remarks that Korea’s effective property tax rate remains lower than that of the United States, coupled with discussions about ending the temporary suspension of heavier capital gains taxes on owners of multiple homes and restricting long-term ownership deductions, have revived fears of another tax drive.

In this respect, the current government differs little from its predecessors. It remains fixated on real estate taxes and burdened by longstanding misconceptions.

The experience of previous administrations offers an important lesson. On average, member countries of the Organisation for Economic Cooperation and Development (OECD) collect 56 percent of their real estate tax revenue from recurring property taxes. Korea is unique in collecting more than half its from transaction taxes. As a result, the combined burden ranks among the highest in the OECD as a share of GDP.

That is why holding taxes should not be increased while leaving in place transaction taxes that distort residential mobility and asset allocation.

Korea’s relatively low holding-tax burden is not primarily a consequence of the comprehensive real estate tax paid by the wealthiest households. The real issue is that the effective property tax rate imposed on all owners remains low by international standards. Households already subject to the comprehensive tax pay amounts close to the global average. Without a major adjustment to the property tax itself, normalizing the system will be difficult. Comparisons between Manhattan and Seoul’s Gangnam District therefore miss the point.

Korea’s limited territory and high population density have pushed housing prices far above income levels. Because incomes remain constrained, taxpayers struggle to absorb heavy holding costs. Resistance to property taxes has repeatedly intensified, at times threatening the political fortunes of entire administrations.

This outcome was not accidental. It reflects the inevitable consequences of a dual structure combining high transaction taxes with mounting holding costs. Korea has repeatedly paid a steep price to rediscover a simple truth: Taxes cannot prevail against public opinion.

An even deeper misunderstanding concerns the capitalization of taxes. The argument that higher holding taxes reduce housing prices holds only in competitive markets with ample supply and demand. Seoul’s most desirable neighborhoods, however, are defined by chronic excess demand supported by superior transportation, schools and amenities.

In such areas, expectations of future capital gains easily outweigh the additional tax burden. Higher holding taxes become merely another cost of ownership rather than an incentive to sell. Home prices therefore remain largely unaffected.

The situation is very different outside the Seoul metropolitan area, where housing supply is more abundant. There, higher holding taxes could depress prices and further weaken local markets. In practice, holding taxes risk becoming a policy tool that leaves strong markets untouched while placing additional burdens on weaker ones. The failure of previous governments’ tax policies stemmed largely from a misunderstanding of this market structure.

Policymakers may seek to avoid such risks by targeting only a small number of wealthy owners and holders of multiple homes. Yet tax increases that generate little additional revenue amount less to economic policy than to political symbolism. Taxation in a democracy should rest on broad public consent, not on measures directed at minorities simply because they lack political influence.

Those entrusted with policymaking have a responsibility not to place personal ideology ahead of sound tax design. The path forward is clear. Transaction taxes should first be reduced and the property tax normalized. The holding-tax structure can then be simplified, ultimately leading to the integration of the property tax and the comprehensive real estate tax.

That is the market-friendly route toward a fairer system that promotes transactions while improving equity in property ownership. The more politically difficult the challenge, the more essential it becomes for businesses, lawmakers and the government to reach a consensus through open debate. A tax system drafted behind closed doors can win neither public trust nor lasting legitimacy.

One can only hope that the tax revision bill that is unveiled in two weeks will prove prudent and rational.