The double-edged sword of Korea's comprehensive property tax

Cho Min-geun

The author is an editorial writer at the JoongAng Ilbo. 

“Tax policy has to make sense to the public. Only then will people accept it.”

Early this year, while President Lee Jae Myung declared a “war on real estate speculation” on social media, Deputy Prime Minister and Finance Minister Koo Yun-cheol took a more cautious approach. He agreed with Lee that loan and tax benefits for multiple-home owners should be withdrawn but stressed public acceptance and was especially guarded about single-home owners. If the market stabilized, he said, there would be no need to touch taxes.

But the market did not cooperate, and tax reform gathered momentum. The government’s sights shifted from multiple-home owners to those with a prized “one smart home,” then to single-home owners who do not live in their property.

The result is familiar. Less than a month after unveiling the plan, the government began to revise it, and Koo was abruptly replaced. With Lee’s approval rating falling, even the ruling Democratic Party complained that the proposal did not “make sense.”

The plan suggests that Koo did consider public acceptance. The punitive taxation threshold of ultraexpensive homes is one example. The basic comprehensive real estate holding tax deduction for owner-occupied single homes was to rise from an assessed value of 1.2 billion won to 1.4 billion won ($877,400 to $1.02 million), reducing burdens on homes worth roughly 2 billion to 3 billion won while concentrating increases on those above 4 billion won. In effect, the government tried to focus the burden on three neighborhoods in Gangnam District, southern Seoul. The balancing act was deliberate: ease the burden on moderately expensive homes while directing heavier taxation toward the most expensive properties concentrated in affluent southern Seoul.

But the proposal could not overcome opposition to penalizing nonresident single-home owners. With that provision retreating while the ultraexpensive home measure remains, the reform’s character has become clearer: It is essentially a “Gangnam tax.” The retreat has also damaged the case for tax normalization and policy credibility.

The comprehensive real estate holding tax was designed from the start to target housing prices, especially in Gangnam. Article 1 explicitly lists stabilizing real estate prices as an objective. Its unusual system of aggregating property holdings by individual and applying progressive rates has even prompted some to call it a uniquely Korean tax.

For governments, it is a convenient policy weapon. Because it operates separately from ordinary property tax, it can target specific groups. The government also has broad discretion, using the fair market value ratio set by enforcement decree almost like a second tax rate. That allows officials to adjust the burden according to market conditions and perceived tax resistance.

But that flexibility is also a trap. When a sharp sword is available, governments are tempted to draw it. Pressure to “do something” intensifies whenever housing markets become unstable. Governments repeatedly succumb even though they know taxation can suppress only a limited segment of expensive housing, and usually only temporarily.

That makes the tax a double-edged sword for the government itself. But because it was political from birth, reforming it carries political costs. Conservative governments have weakened it substantially but never abolished it.

Experts broadly agree that Korea should raise recurrent property taxes while lowering transaction taxes. But even discussing that principle is difficult because recurrent taxation is divided between local property tax and the national comprehensive real estate holding tax. Different ministries and National Assembly committees oversee them. Although the latter is collected nationally, all its revenue is distributed to local governments, further entangling regional interests. It was easier to create than to reform from the beginning. The structure also makes comprehensive reform administratively and politically difficult, even when economists broadly agree on the direction Korea’s property taxation should take.

Still, Korea cannot blame these institutional “nails” forever. For more than two decades, the comprehensive property tax has repeatedly accelerated and braked sharply, steadily undermining public acceptance.

As the National Assembly reviews the latest proposal, lawmakers should look beyond disputes over individual provisions. They should begin considering how Korea’s entire property tax system can finally be placed on a stable, coherent and publicly credible footing.