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[Editorial] Tax politics

With election season coming, Democratic Party likely to step up pressure over tax policy

The government is planning to reduce property taxes for individuals who own one home valued at 600 million won ($530,000) or less.

Earlier, the ruling Democratic Party of Korea -- mindful of the municipal by-elections in Seoul and Busan next year -- demanded that the threshold be raised to 900 million won, but its attempts fell through due to the government’s strong opposition.

But the government will maintain the minimum stockholding value for the imposition of stock transfer tax at 1 billion won in a single company, as demanded by the party, instead of the 300 million won that the government had originally proposed. This tax will be levied on stock-trading profits taken by shareholders who hold 1 billion won or more worth of a company’s stocks at the time of taxation.

Housing prices have skyrocketed due to policies that suppress demand and penalize owners of expensive homes or multiple homes. Against this backdrop, the government raised the state-assessed property values that it uses to calculate property taxes. As a consequence, property taxes on Seoul apartments increased as much as 22 percent on average this year.

Late last month, the government said it would jack up state-appraised values to 90 percent of a property’s market price. In December last year, it had already raised the comprehensive real estate holding tax rate for those who owned one home.

Raising state-set property values leads to an increased tax burden. Taxpayers are already hard-pressed by the higher holding, transfer and acquisition tax rates. On top of this, the scheduled escalation of state-assessed property values will make matters worse.

For instance, the average annual holding tax for an apartment in Jamsil in southern Seoul is estimated to soar from 8.37 million won this year to 21.33 million won in 2025, when its state-assessed value rises to 90 percent of its current market price. The increase is too steep.

The change will not just affect property taxes. National health insurance premiums and other government-imposed charges calculated on the basis of state-set property values will increase too.

A property does not generate income when its owner resides there. If holding taxes surge due to an increase in state-set property values, it will be difficult for ordinary homeowners or unemployed seniors to bear the increased tax burden. They will have no other choice but to reduce consumption or sell their homes. The government must proceed cautiously when seeking to increase tax revenue.

Also, it is questionable whether it is right to raise the base to 90 percent of a property’s market price. Market prices do not necessarily reflect homeowners’ ability to pay.

The policy to lower property taxes for homes appraised by the government at 600 million won or less is controversial, too. The decision to offer a selective tax cut, while taxes are raised across the board, is divisive and inequitable.

Real estate policies under the government of President Moon Jae-in tend to polarize the people according to homeownership status, price and location. They pit landlords against tenants, homeowners who face comprehensive holding taxes against those who do not, and those who benefit from property tax cuts against those who do not.

The ruling party requested that the stock transfer tax base be maintained as is in consideration of by-elections set for April next year.

The government was scheduled to lower the tax base to 300 million won in accordance with a related enforcement decree revised three years ago. Under the decree, it had already reduced the base to 1 billion won this year from 1.5 billion won in 2018.

But as retail investors opposed the reduction of the tax base to 300 million won, the Democratic Party insisted that the government leave it at 1 billion won.

Deputy Prime Minister for Economy Hong Nam-ki argued that the tax threshold should be lowered as scheduled, but gave in to the ruling party’s demands in the end. Then he offered to resign to take responsibility for failing to keep up with the schedule. However, President Moon rejected his resignation immediately, and a day later Hong effectively overturned his decision.

On more than one occasion, Hong has failed to stand up to pressure from the Democratic Party. As demanded by the party, the government lowered the stock trading tax, gave COVID-19 emergency relief funds to every household, and set up a real estate supervisory body.

The Seoul and Busan mayoral by-elections will be held next year, followed by the presidential election the year after next. Concerns are growing that the ruling party and Cheong Wa Dae will step up pressure on the government to adopt populist tax policies.
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