Since the 2008 global financial crisis, inequality has been increasing worldwide. In particular, levels of wealth (asset) inequality are increasing further than income inequality. And Korea is no exception. This deepening of inequality is more worrisome in that it leads to inequality of opportunity while suppressing movement between classes, which in turn deepens inequality, creating a vicious cycle of inequality. This is a bigger problem than the inequality itself. The international communities are calling for stronger property taxes, including recurrent taxes on immovable property, as part of mitigating inequality and promoting inclusive growth. In Korea, there is heated discussion on property taxes, such as recurrent taxes on immovable property including the comprehensive real estate tax. Therefore, this study aims to investigate policy directions in international organizations and major countries on immovable property tax and examine the effect of property tax on the macro economy.
This study consists of four parts. In Chapter 2, we examine the direction of international organizations’ tax policy on immovable property and the current real estate tax system of major countries. The international communities, represented by organizations such as the OECD, World Bank, and IMF, have been calling for stronger property taxes, such as recurrent taxes on immovable property, since the global financial crisis in 2008, and this trend has continued even after the COVID-19 pandemic in 2020. In particular, the introduction or reinforcement of a wealth tax, a new type of property tax, has recently become an issue of discussion. When comparing the real estate taxation systems of Korea, the United States, the United Kingdom, Canada, and Singapore, several characteristics become evident for Korea. In terms of the purpose of imposing immovable property tax, these major economies and Korea share the aim of securing local government finances, but the difference is that the international communities are focusing more on inclusive growth and improving inequality, while Korea is more focused on stabilizing the real estate market. As for the tax rate structure, countries except Singapore have a proportional tax rate system, whereas Korea operates an excess progressive tax rate system. It is also characteristic that Korea evaluates the value of real estate based on market price every year. On the other hand, with the exception of some countries, Korea and major countries have in common that the immovable property tax is a local tax, the taxpayer is the owner, the property tax deduction and tax exemption system exist, and the taxable value is based on the total value of the house.
In Chapter 3, this study examines international comparisons of immovable property tax burdens using OECD data. First, in terms of time series for OECD countries, the average immovable property tax ratio (to GDP or total tax) has risen since the 2008 financial crisis. The ratio of financial and capital transaction taxes showed a relatively large drop, and inheritance and gift taxes ratio showed a sideways trend. In Korea, the immovable property tax ratio is also showing a modest increase. The ratio of transaction taxes, including real estate acquisition and registration tax, generally flattened during fluctuations, while that of inheritance and gift tax showed a steady rise. Next, in terms of cross-sectional comparison, Korea's immovable property tax ratio was lower than the OECD average level. Based on the effective immovable property tax ratio (immovable property tax revenues to total private real estate assets), which is an indicator of the actual tax burden on immovable property, the average of 15 OECD countries was 0.30%, while Korea recorded 0.17% in 2019. This seems to be due to the relatively high real estate price level, low tax base realization rate, and low immovable property tax rate in Korea. In 2019, Korea's private real estate market capitalization to GDP ratio was 5.54 times, the highest among comparable countries, far exceeding the average of 15 OECD countries (3.75 times). Meanwhile, in the case of financial and capital transaction taxes, inheritance and gift taxes, Korea recorded 1.75% and 0.43% of GDP, respectively, higher than the OECD average of 0.44% and 0.12%. In terms of total property taxes to GDP ratio, Korea recorded 3.12%, which is higher than the OECD average (1.85%).
In Chapter 4, we analyze the effect of immovable property tax on housing prices in OECD countries using the dynamic panel model. According to the results of the analysis, an increase in the immovable property tax has a negative impact on the real housing price change rate, Price to Income Ratio (PIR), and Price to Rent Ratio (PRR). This seems to be because the strengthening of the immovable property tax raises the cost of owning a house, which increases pressure to sell houses or weakens the motivation to purchase houses. In particular, the fact that the strengthening of immovable property tax has the effect of lowering not only real housing price but also PIR and PRR has great significance in that it lowers the risk of a bubble in the real estate market. On the other hand, an increase in financial and capital transaction taxes has a positive impact on the real housing price increase rate, PIR, and PRR. This seems to be because the strengthening of transaction tax has a greater effect on deterring housing sales than the effect of weakening housing purchases.
In Chapter 5, we investigate how the increase in property tax affects income inequality and economic growth in OECD countries. The analysis is conducted using a country and year fixed effect model, two-stage least squares, generalized method of moments, and three-stage least squares. According to the empirical result, an increase in immovable property tax is closely associated with decrease in income inequality, and at the same time, an increase in property tax can have a negative impact on short-term economic growth. We also find that the increase in income inequality does not lead to an increase in property tax. This decision-making behavior seems to be related to the OECD's policy recommendation to use the property tax as a means to improve income inequality.
In Chapter 6, we present policy implications for Korea. First, in terms of the purpose of real estate policy, the Korean policy authorities need to shift toward a more fundamental and broader perspective, such as inclusive growth and sustainable growth, which the international communities are emphasizing, rather than the Korean government’s current focus on stabilizing the real estate market. This change in perception of real estate policy is very important in that it lays the foundation for more fundamental, continuous, and systematic real estate policy. Second, in terms of the real estate tax system, the policy direction and mix of gradually raising the immovable property tax and lowering transaction tax at the same time should be consistently pursued in order to achieve stability in the real estate market, inclusive growth, and sustainable growth. Finally, when improving the property tax system in the future, Korea's unique characteristics – such as a very high real estate price level, the jeonse system, and a low ratio of self-owned houses compared to major countries – should be taken into consideration.