South Korea

South Korea SWOT Analysis

By Jeffrey J. Smith

Summary

From as early as 50 BC, Koreans have had the duty of paying for land to their government, a rent to their king. Through the millennia, the land dues went through many transformations yet nevertheless persisted until the 19th century. Then the Japanese colonized Korea and created a cadastre that more stringently identified landowners and levied upon them a land-value tax separately from taxes on property improvements.

Modern South Korea has several land taxes. The central government – which appointed all local administrators until 1995 – taxes the income stream from a property and the gains from a sale while the local government taxes registering and holding land. The taxes on land come due in the spring, on buildings in the fall. How much these property taxes contribute to the operation of local government varies widely from 30% of budget in some jurisdictions to 80% in others.

The wide range depends on two factors, one political and one economic. The economic one is simply how much land rent is available, which typically is more in urban jurisdictions and less in rural ones. The political factor is the relationship between the central government and the particular jurisdiction, how much land-based revenue the central government returns to the locality, which can be a factor of political favoritism.

We do not have any more recent information to be able to tell if localities have won greater autonomy or if either government – local or central – has increased or decreased it recovery of ground rent. We do not know how much revenue these property taxes raise compared to other taxes. Nor do we know if the taxes on land raise more revenue than the ones on buildings. Contemporary news reports tell us that there have been proposals to tax land and much discussion and dissent, which is typical when land rent lines the pockets of well-connected speculators.

Due to economic growth and land speculation, the value of Korea’s land by 1990 was nine times its GDP, a much higher ratio than experienced by other countries, including Japan. In 1989, the appreciation in the value of locations was 35% greater than the earnings of all urban workers, and most of that land value increase escaped taxation. Only 5% of the population owned 65.2% of the nation’s best land, which is in short supply as South Korea is very mountainous, like Taiwan, so most acreage is desolate.

As in many places, especially those where location value rises rapidly, for years the government did not keep assessments current. Both speculators, who tend to have more political power, and normal landowners, who tend to be very numerous, complained about higher taxes on land. Local governments did not increase land rent recovery since they were able to obtain revenue from other taxes and from the central government.

Failure to reassess land as it grows in value of course benefits most those owners of land growing fastest in value. The reform of 1989 did lead to assessments that reflected actual market value but the government vitiated that by later further lowering tax rates.

In response to the high cost of land and to the potential of a recession once the bubble bursts, the government tried to discourage speculation and land hoarding. It reinforced the registration of land titles, reformed land assessment, limited the amount of land ownable per household, and levied taxes on landholding, land development, and on land-value increments. These extra taxes were tantamount to creating higher rates for larger holdings and more valuable holdings. The various rates ranged from one tenth of a percent to five percent, presumably of the land’s selling price or capital value. The extra complexity of various rates for various uses by various owners does come with a greater administrative cost.

While government assessors did try to calculate true market value of land, the official taxable values of sites are only 15%-20% of known market price. And since the rates of most taxes on land are low, the government’s light collection of land rent did little to modify landowners’ behavior. They still speculate, amass acreage, and withhold prime sites.

The one land tax that was an exception to the pattern of leaving rates low was the one on gains from sales of idle land which came into effect when a parcel was sold; in fast growing regions, its rate was set at 50%. Since this steep rate applied only to idle land, some owners built cheap and ugly structures to avoid having their land classified as “idle”. Thus when owners sold their no longer idle land, they could still reap maximal profit. The waste of labor and materials exacerbated a shortfall of both inputs needed for construction of genuinely desired buildings, which harmed society at large.

Other landowners paid the tax on gains but had to downsize their holdings and sell off their excess in order to be able to make the tax payment. While the tax worked for society and buyers – it broke up large holdings – those owners who had to sell complained that the tax violated the principle of ability to pay. In 1995 in the Korean constitutional court they won a ruling against the tax which now is little used.

Registration of land may be unique in Korea. There the government keeps two official records for each parcel. One is economic, detailing the value of the plot, and the other is political, detailing the rights and privileges attached to the lot.

In 1997, Korea was visited by financial panic. Local banks had borrowed heavily from global lenders to gamble on real estate. When new buyers of properties could not be found and short-term loans became due, liquidity dried up. The process was repeated around the globe, culminating in many currencies of many nations being devalued and their governments taking on more debt from the IMF. To reverse the slide in land prices, the Korean government targeted and reversed many of its 1989 reforms, however mild and ineffectual they may have been. It opened tax loopholes, lifted the limit on acreage holding, and allowed foreigners to own real estate directly. The greater leeway made it easier to trade in mortgages and attracted fresh liquidity.

As a result, the new anything-goes atmosphere not only enabled a new round of speculation in real estate but also further integrated the real estate and finance sectors, and the local and global economies. As long as land rent is left out of the public treasury and kept as an object of speculation, such new integration generates risk for the Korean economy. More credit is created, which is inflationary. And it is channeled to speculators, leaving less for actual production. Further, outside investors with large pools of cash will bid up local real estate values then withdraw their investments when land prices fall, leaving Korean borrowers desperate for liquidity.

STRENGTHS

The major strength of the Korean example is it showed that both the public and government can become aware of the harmful consequences of rampant speculation in land and become moved to try to correct the situation, which is what they did with the reforms of 1989.

Additionally, despite whatever shortcomings it may have had, the 1989 package was able to direct the bureaucracy to reassess all the land of the entire nation of South Korea.

Of course, passage and implementation of the reform was made easier by the fact that Korea had a tradition of paying taxes on land and that speculation had become so rampant that it was visible to even the casual observer. Nevertheless, since speculation is universal and rapid rises in well-situated urban land is a worldwide phenomenon, it should be possible to make the connection between the problem of unaffordable land and the solution of public recovery of land rent.

WEAKNESSES

The example of South Korea has several weaknesses: