Amid the recent stagnant property market in Korea, the Korean government cut its acquisition statutory tax rate from 2~4% to 1~3% in accordance with home prices through the 2013 tax revision to stimulate home purchases. To make up for the loss in fiscal revenue for local governments due to the tax cut, the central government raised the financial base of the local consumption tax from 5% of value-added tax revenue to 11%, up 6 percentage points. Furthermore, following the additional property measures in 2014, the trading volume witnessed a significant rise between August and November 2014, exceeding 1 million trades for the first time since 2006.
In this report, our analysis was based on two types of data. First, the trading volume in the housing market by primary local governments was analyzed using panel data with dependent variables. Based on the data from 168 local governments, trading volume in the housing market increased 0.347~0.390% when the acquisition tax rate was reduced by 1%, and the trading volume increased 21.7~24.1% with a further tax cut.
Second, the trading volume was analyzed according to the data on transaction volume by purchase price provided by the Ministry of Land, Infrastructure and Transport. As a result, the trading volume increased 0.288% with a tax cut of 1%. Also, after analyzing the dependent variables by purchase price under the OLS method, the effect of the tax rate cut tended to increase as the purchase price rose. When calculating the amount of increase in transactions based on the acquisition tax rate cut using estimates of tax cut effects by purchase price, the trading volume was estimated to increase by 12.4~26.3% by home price due to acquisition tax cut.
Using the same data, the forecast of the 2014 trading volume was estimated at 928,000, an increase of 137,000, up 17.2% compared to 2010-the most recent year when an additional reduction in acquisition tax was not implemented. When calculating local tax revenue before and after acquisition tax using the data, the revenue decreased KRW 1.6 trillion annually, from KRW 4.5 trillion to KRW 2.9 trillion, due to the cut in acquisition tax rate. The local tax revenue of the new market equilibrium where the additional trading volume reached 137,000 with the tax cut stood at KRW 2.9 trillion, a KRW 1.6 trillion decrease in tax revenue compared to the previous market equilibrium. On the other hand, the Ministry of Government Administration and Home Affairs drew up measures to make up the financial loss for the local governments under the assumption that local tax revenue would decrease KRW 2.4 trillion due to lowered tax rates on home purchases. However, that amount looks to have been excessively overestimated by about KRW 0.7 trillion compared to the net decrease of KRW 1.6 trillion in local tax revenue. The reason for the big gap is because the government failed to reflect the increase in local tax revenue of new transactions.
The Korean government inevitably raised the local consumption tax rate to make up the loss at the right time for the fiscal revenue of local governments due to the acquisition tax rate cut. In the case of the 2011 additional cut in the acquisition tax rate, ex-post settling was applied for the decrease in local fiscal revenue after the policy was implemented. However, in the case of the acquisition statutory tax rate, the method changed to settling beforehand by raising the local consumption tax rate through the 2013 tax revision, resulting in excessive replenishment. In the future, further amendment is required for similar cases.
Chae Eundong
In this report, our analysis was based on two types of data. First, the trading volume in the housing market by primary local governments was analyzed using panel data with dependent variables. Based on the data from 168 local governments, trading volume in the housing market increased 0.347~0.390% when the acquisition tax rate was reduced by 1%, and the trading volume increased 21.7~24.1% with a further tax cut.
Second, the trading volume was analyzed according to the data on transaction volume by purchase price provided by the Ministry of Land, Infrastructure and Transport. As a result, the trading volume increased 0.288% with a tax cut of 1%. Also, after analyzing the dependent variables by purchase price under the OLS method, the effect of the tax rate cut tended to increase as the purchase price rose. When calculating the amount of increase in transactions based on the acquisition tax rate cut using estimates of tax cut effects by purchase price, the trading volume was estimated to increase by 12.4~26.3% by home price due to acquisition tax cut.
Using the same data, the forecast of the 2014 trading volume was estimated at 928,000, an increase of 137,000, up 17.2% compared to 2010-the most recent year when an additional reduction in acquisition tax was not implemented. When calculating local tax revenue before and after acquisition tax using the data, the revenue decreased KRW 1.6 trillion annually, from KRW 4.5 trillion to KRW 2.9 trillion, due to the cut in acquisition tax rate. The local tax revenue of the new market equilibrium where the additional trading volume reached 137,000 with the tax cut stood at KRW 2.9 trillion, a KRW 1.6 trillion decrease in tax revenue compared to the previous market equilibrium. On the other hand, the Ministry of Government Administration and Home Affairs drew up measures to make up the financial loss for the local governments under the assumption that local tax revenue would decrease KRW 2.4 trillion due to lowered tax rates on home purchases. However, that amount looks to have been excessively overestimated by about KRW 0.7 trillion compared to the net decrease of KRW 1.6 trillion in local tax revenue. The reason for the big gap is because the government failed to reflect the increase in local tax revenue of new transactions.
The Korean government inevitably raised the local consumption tax rate to make up the loss at the right time for the fiscal revenue of local governments due to the acquisition tax rate cut. In the case of the 2011 additional cut in the acquisition tax rate, ex-post settling was applied for the decrease in local fiscal revenue after the policy was implemented. However, in the case of the acquisition statutory tax rate, the method changed to settling beforehand by raising the local consumption tax rate through the 2013 tax revision, resulting in excessive replenishment. In the future, further amendment is required for similar cases.
Chae Eundong