[Editorial] Government Should Increase Its Tax Base, Not Taxes

Korea’s property-related taxes accounted for 11.8 percent of its tax revenues in 2003, ranking Korea second among Organization for Economic Cooperation and Development (OECD) countries in terms of property taxation.

This rate is twice as high as the average OECD rate of 5.6 percent. And if the actual transaction prices of real estate taxation and integrated real estate taxes are considered together, Korea is likely to rank first in the world in terms of the ratio of property-related taxation to tax revenue.

This is in contrast to the fact that Korea is last in Asia when it comes to economic growth rate.

Private demand for investment will fall if taxes on the retention and trade of real estate and financial assets are heavy. Property is what is left after consumption and taxes are subtracted from income. Therefore, property-related taxes create disputes over equity, especially among people who spend most of their income and are left with less money, and who face “double taxation” on both their income and their property. In addition, making use of taxation as a means to redistribute wealth is a threat to the private right to own property, and will potentially disturb the market economy’s basic order.

Currently, most people who have to pay integrated real estate taxes are treated like speculators and are heavily taxed. This encourages hiding property overseas and discourages investment.

Property taxes are said to be imposed mainly on those in high-income brackets. However, they do not leave middle and lower income earners with less of a tax burden. Actual taxation transactions are predicted to increase the possession tax burden on the middle and lower class. Tax increases are an important factor in lower rates of consumption that come from weaker consumer purchasing power.

The government estimates that per capita and social security taxes will amount to 4,650,000 won next year. That is 9.2 percent or 390,000 won higher than this year’s tax of 4,260,000 won. This means that people will pay much more than just a 5.2 percent tax on their estimated nominal wage increases when a family’s household debt is more than 30 million won. Private education fees which account for more than three percent of GDP should also be factored in. By this calculation, it is hard to expect that the people will be better off.

Excessive taxes dampen investment and consumption, eat away at growth potential, and prolong the economic slowdown. Therefore, the government should not try to find ways to spend money. It should implement a growth policy which stimulates investment and consumption to expand its tax base.