On September 4, Choo Mi-ae,
the chairwoman of the ruling
Democratic party, addressed
the theory of the land value tax
propagated by the late American Henry
George, one of the greatest thinkers and
journalists back in the 19th century. He
suggested a government tax that would
absorb the increase in the value of land
because such an increase was purely
‘natural’ and was a burden that must be
shared by the entire community. By so
doing, he argued that the revenues can be
used to invest in education and infrastructure
without the need for raising income
tax or corporate tax.
The reason Choo quoted Henry George at the congressional opening session was very clear: she wanted to introduce a tax on properties, namely tax on land and housing. She emphatically stated that a new tax system on properties (also known as Rent Reform 2017), will reinvigorate Korea. Her speech brought huge backlash not just in the political arena but in the public sphere, as it means increased tax for almost everybody who owns a house or land. One opposition party called this system to be obstructive, and another denounced it as going against the wind of the market. Considering that the legislation in the National Assembly cannot be carried out without the consent of the opposition parties, there are many questions to be answered before making a judgment on the desirability of the property tax.
First, there is the question of whether it is fair. It would be unfair to levy the tax for property that has hardly changed over the years. From 2000, the average price of housing rose by 1.98 times, while GDP (in KRW) increased by 2.84 times and workers compensation by 2.82 times. Even per capita GDP rose by 2.58-fold. So it’s hard to argue that the price of housing has risen to the level of speculation for the last couple of decades. Of course there are some cases where prices have gone up dramatically now and then, but that doesn’t mean that the
entire housing market is subject
to this rapid rise.
The second and potentially stifling problem is the possibility of tax resistance. Income tax for the rich and corporate tax for chaebols have already been raised substantially by this government. In 2016, people are paying about KRW 10 trillion (USD 8.85 billion) for property taxes. Either these people have to pay significantly more or there needs to be new taxpayers that will pay for the increased property tax.
The third problem is whether the imposition of property tax will lower the recent hike in property prices. Of course that depends on the scale of property tax; namely, how much property tax rate will be raised. Currently, those with houses worth USD 1 million pay about USD 1,900 a year for property tax. The tax rate stands at 0.5 percent, but there is a basic deduction of USD 522,000 and an additional 20 percent (USD 200,000) of value deduction. So, the effective tax rate on a USD 1 million house is a mere 0.19 percent. Now, if the government wants to double or triple the effective tax rate, a tax amounting to an additional couple thousand dollars wouldn’t cause people to sell their homes. It’s hard to believe that doubling property tax would render a significant fall in housing prices. If there really are many people willing to sell their homes because of higher property tax, it is natural to believe that there are equally just as many people not willing to buy houses because of higher tax. If this is the case, then there won’t be significant changes in housing prices.
The fourth problem with property tax is the transfer of higher tax on the tenants. Most landlords will pass higher property tax on to their tenants by raising the rent, so it will not be the land owners but the renters who are levied by the tax.
The last issue is related to the congressional landscape. The ruling party’s seat (120 out 300) currently
occupies no more than 40 percent, and the congressional
procedurerequires at least 60 percent assent
approval for balloting a bill on the floor;
thus, any proposed property tax bill has little
chance to even make it to the ballot
with the consent of the opposition party.
When Henry George advocated the Land/Location Value Tax (LVT) in the 1860s, land prices were rapidly rising due to huge westward migration and discoveries of gold and silver mines all across the US. Railways, canals and highways were being built on the vast uninhabited area. In those years, most land owners were able to receive incredibly high land rent, and George’s idea of LVT on their profits were more than just and fair to most Americans. But now, especially in Korea, the housing market is totally different. The recent housing market boom since 2015 was mainly due to extremely low interest rates and government stimulation policies. Under the previous government, the base rate of the Bank of Korea was lowered five times from 2.75 percent to 1.25 percent. In addition to that, the central bank has poured trillions of won following a quantitative easing policy. So, for the purpose of normalizing house prices, it is essential to make interest rates return to normal levels, which is believed to be 2 percentage points higher than the current level.