Republic of Korea - South Korea - analysis of property tax system

American Journal of Economics and Sociology, The, Dec, 2000 by Tae-Il Lee

TAE-IL LEE [*]

FROM AS EARLY as 50 B.C. (the Three Kingdom period), payment of land tax has been one of the basic duties Korean citizens have had to perform, along with military service and service for public works. The ownership of land was traditionally considered to be in the hands of the royal dynasty and the king, and the land tax was an in-kind charge for the right to cultivate assigned farmlands. Although the structures and the implementation schemes differed substantially from dynasty to dynasty, and even during different periods of the same dynasty, a similar principle more or less persisted until the end of the l9th century.

With the opening of the 20th century, modern techniques of land resource management were eventually introduced to Korea by the Japanese colonial government (from its own motives of pillage); these include a cadastral survey of the entire country, land-value taxation, and a land use planning system. In the course of the first national cadastral survey (1910-1918), the primitive, loosely organized land ownership pattern that had prevailed previously virtually disintegrated, and a clearer land title concept was enforced, with corresponding tax liability. In this modern concept of real-estate as introduced to Korea, the land and its improvements were treated as separate entities, and property taxes thus levied separately upon them.

I

Land-Related Tax System in Modern Korea [1]

A. An Overview of Land Taxes

As is the case for most other countries, land taxes by the central government in Korea are basically imposed on the income stream from the property and the capital gains realized at the time of transaction, while the local property taxes are levied on acquisition and registration, and on ownership. Table 1 shows the array of different land taxes currently being imposed on Korea in each sequential stage of land ownership cycle.

It should be noted that, before the beginning of the local autonomous political system in 1995, the central government made virtually all the rules in Korea. Instead of having governors, mayors, and county heads appointed by the Ministry of Home Affairs (MOHA), local citizens now elect their administrators through direct vote. Besides these elections, however, not many changes have been made yet in overall local administration.

B. Administration of Property Tax

MOHA is the central government agency responsible for overseeing the activities of the local governments, and even for taxes labeled as local taxes. Tax codes used to be and are still largely established by MOHA, which defines the details of tax bases, rate structures, exemptions and reductions, and collections as well as appeal procedures. Formerly, local property taxation in Korea was simply an extension of the central government's activities, part of it (e.g., collection) being delegated to municipalities and counties. The levying and management of property taxation, which usually constitutes a major portion of any local government's revenues, [2] did not at all reflect each locality's distinctive financial situation.

As has already been pointed out, all the property-related local taxes in Korea make a clear distinction between land and buildings. The distinction apparently is not derived from the influence of Henry George, since buildings are also taxed, possibly at even higher rates, by the same property taxes as those on land. Currently, the land portions of the property tax are levied in the spring of each year and the building portions in the autumn.

II

Public Concept in Land (To-Ji-Gong-Gac-Nyom)

A. Background

The bad memories of nation-wide land speculation in the late 1970s had scarcely faded when land prices soared again in the late 1980s. Although the rate of increase was not the highest Korea had ever seen, the absolute level of prices was such that the social and political problems generated posed a serious potential threat to the national integrity. For example, the total sum of the value of the nation's landed resources was estimated to be more than nine times the size of the GNP in 199O, [3] much higher than the figure for most other countries and even higher than in Japan.

The magnitude of the "capital" gains from the price appreciation in the year of 1989 alone was estimated to be 35 percent more than the local aggregate income earned by all urban workers in the same year. For a number of reasons, however, most of these unearned gains were virtually free from the recapturing efforts of tax authorities.

The government recognized that, if not properly taken care of, these issues could not only shatter the nation socio-politically, but also create a bottleneck for future economic growth. Thus from 1987 to early 1989, when the land price increase began to show signs of letting-up again, the government introduced a set of new policies, popularly known by the comprehensive term, "To-ji-gong-gae-nyom" (Public Concept in land).

Interpreted as measures to enhance pubic interests in land-related matters, they include: the comprehensive landholding tax, a new system of land assessment, a reinforced land title registration system, and three completely new measures which some regard as rather radical--the ceiling on urban residential land per household, the development charge, and the land-value increment tax. However, since the ceiling on urban residential land, and the development charge are not exactly tax measures, they will not be discussed in this chapter. [4]