Housing-related taxes in Korea are a sub-sector of housing policy. That is, stabilizing the housing market has been prioritized over the goals and principles of the entire taxation principles. Housing-related taxes are constantly revised due to overheating and cooling of the housing market. Accordingly, the purpose of the tax has been undermined, and the predictability and stability of the tax have been reduced. In particular, the current capital gains tax has been reduced as a means of stabilizing the housing market and supporting single homeowners, losing the efficiency and equity of taxes. This study aims to evaluate the effect of the housing tax system on housing prices and the market and to present an effective direction for reforming the capital gains tax in terms of the income tax system.
Most of the previous literature on capital gains tax has proposed a tax reform plan that focuses solely on the level of the tax burden while maintaining the big framework of preferential policies for one home-owning household and tweezers taxation for multiple homeowners. In this study, a more efficient and equitable capital gains tax reform plan was proposed based on the basic principle of income tax that imposes the same tax burden on the same income regardless of the source of occurrence. In other words, the main purpose of this study was to design a capital gains tax reform plan that realizes the consistency of the entire income tax, rather than a sub-sector tool of housing policy.
For this purpose, this study presents the concept of Haig-Simons income as a basic principle of restructuring capital gains tax on housing. According to the Haig-Simons concept, income is a change in all economic capabilities that can lead to individual consumption and savings. Thus, it should be treated the same as a subject of taxation, regardless of the source. In this study, the capital gains tax system proposed maintains the Haig-Simons concept of income while accepting taxation at the time of realization.
Initially, an innovative taxation strategy was introduced, dubbed as "the annual tax multiplied years method". This approach involves dividing the realized capital gains by the duration of holding, aggregating the resulting figures with the yearly comprehensive income, establishing a novel tax basis, and subsequently computing the applicable tax amount. However, supplementary measures are necessary, such as the elimination of tax exemption advantages for households owning a solitary residence and the special deduction for extended ownership. Moreover, acknowledging the escalation in asset prices in parallel with the inflation rate as the fundamental deduction for capital gains is vital. Moreover, we may recognize the increase in asset prices equal to the rate of inflation as a basic deduction for capital gains. Second, in order to mitigate the locked-in effect and ensure the freedom of residence, a tax deferral system for residential housing is introduced. Third, the time limit of tax deferral is when inheritance or gift occurs. Therefore, the deferred capital gains tax is levied at the time of inheritance or gift.
Next, we conducted a detailed tax burden simulation using the ‘2019 National Survey of Tax and Benefits’ to evaluate the policy effects of restructured capital gains tax. According to the tax burden simulation, the main change in the tax burden following the introduction of the new capital gains tax system occured from the abolition of tax exemption benefits for a single home-owning household while the increase mainly concentrated on properties worth more than 900 million won. As the special deduction for long-term ownership was replaced with the annual tax multiplied years method over comprehensive income, the tax burden of most households decreased slightly, while that of the high asset-high income group increased.
In summary, the crux of tax reform, with regard to the burden of tax, lies in eliminating tax exemption benefits for households that own single homes. An analysis reveals that the annual tax multiplied years approach, when applied to comprehensive income, has only a marginal impact on the average tax burden. However, the effect of this approach on the tax burden differs depending on the income quintile of taxpayers.
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