Path of Policy, Path of Politics: Fallout Over Tax Reform Plan

The central content of the tax reform plan is real estate taxation, but the signal hinting that something was wrong came from the reform of the Individual Savings Account (ISA). On August 7, the president directly ordered a complete review. He chastised the ministry in charge, stating, "The policy was carried out without proper explanation or careful review regarding the removal of existing benefits." He was also reported to have ordered a review of the bill aimed at preventing stock price suppression, asking, "Why was the system designed in a way that fails to reflect the original intent of the reform?"

However, there are a number of puzzling aspects. The tax reform plan was announced on a large scale on August 3, and consultations between the ruling party and the government had already been completed. Above all, the public felt that the driving force behind this bill under the mottoes of "tax normalization" and "fair taxation" came from the Presidential Office and the ruling bloc. If so, there must have been coordination with the Presidential Office and a report to the president before the party-government consultations, making it puzzling that the ministry was criticized after public pushback followed the official announcement by the executive branch. Even within the ruling party, comments emerged such as, "The Ministry of Finance and Economy needs to pull itself together." From the public's perspective, growing questions arise as to whether the Ministry of Finance and Economy announced details that even the Presidential Office and the ruling party were unaware of, or whether party-government consultations were properly conducted. This situation is raising issues over the overall credibility of the tax reform plan.
Procedures remain before the bill is passed and implemented, and the government plans to announce follow-up housing supply measures soon. Nevertheless, the immediate concern is anxiety in the jeonse and monthly rental market. With the government's direction emphasizing "actual residency" in real estate and home sales by multiple home owners, combined with the release of specific real estate tax reform details, landlords have become anxious. One newspaper ran a headline featuring a tenant's complaint: "We even signed a special clause saying 'leave if the house is sold.'" Realistic points are being raised in the market: "It is a fact that owners of multiple homes and non-resident single-home owners play a role in supplying rental housing, but tampering with this structure has left both landlords and tenants flustered." The market fears an immediate shortage of rental listings. As tax burdens on non-resident single homes suddenly increase, incentives have grown for owners to evict tenants and move in themselves. Landlords raising jeonse deposit amounts to match higher taxes or switching to monthly rentals to cover holding taxes each month are also expected to increase.

In response to criticisms that the measures negatively impact the rental market, the government explains that it has expanded tax credits for monthly rent for tenants and will soon announce measures to expand housing supply. Would it not have been more appropriate for stabilizing market sentiment to first announce housing supply measures—the fundamental solution—before the tax reform plan? Above all, housing supply takes time. Follow-up measures to absorb the shock are essential. First, the reduction period for special tax deductions for long-term holding, set in phases over two to three years in the government's plan, needs to be extended by several more years. The goal is to reduce the urgency regarding returning to actual residency or timing a sale, thereby preserving rental periods. Second, in cases where lease contracts are already ongoing, exempting actual residency requirements until contract expiration is also necessary. Experts also suggest partially reviving systems that offer holding tax and capital gains tax cuts to owners of multiple homes who commit to long-term leases while limiting rent increases to a certain level. These are measures that should be considered first to prevent harm to tenants.
The reason behind the strong backlash is that single-home owners, long considered the baseline for economic justice, became a main target. Concerns grew as resistance from the long-standing sentiment that "owning one house means drawing the line" combined with sudden tax burdens. For non-resident single-home owners, the Comprehensive Real Estate Holding Tax deduction limit was lowered to 900 million won. The core of thousands of public legislative complaints flooding in is that "it is unreasonable for the tax burden to increase even in cases where residing in one's own home was unavoidable." The government plan allows non-residence periods of up to three years to be recognized as residence periods if relocation to another city or county occurs due to unavoidable reasons after residing in the home for over a year. It specifies reasons such as schooling, job relocation, medical treatment, school transfer due to school violence, departure abroad for work circumstances, and supporting parents.

The demands from non-resident single-home cases are rooted in more practical life situations, with a prominent number of complaints calling for non-residence due to childcare or family care to also be recognized as exceptions. Voices argue that grandparents who move to the area where working couples reside to care for grandchildren, leaving them with no choice but to rent out their own homes, should not be penalized. There were also consecutive demands to count periods exceeding three years as residency periods, as overseas assignments or childcare periods often extend beyond three years. In addition, the condition of "relocating to another city or county" is viewed as practically too high a hurdle.

Another case involves elderly owners of high-priced homes. Simplified, the government's proposal structures the Comprehensive Real Estate Holding Tax as non-taxable for market values under 2 billion won, reduced tax burden compared to the present for 2 billion to 3 billion won, tax normalization for 3 billion to 4 billion won, and significant increases for over 4 billion won. Complaints point out that many seniors past retirement age have seen their home values rise substantially due to long-term residency, even as they often have no income. The government is offering supplementary measures such as reducing capital gains tax by up to 50% for individuals aged 65 and older who dispose of homes in the Seoul capital area and move to non-capital regions, while easing conditions to defer tax payments until the time of property sale or inheritance. However, alongside expectations that few will desire or be able to move to non-capital areas due to welfare and medical conditions, critics point out the need to further relax income requirements for tax payment deferrals.

The government explained that while it reviewed plans to make exceptions for non-residence due to childcare and child-rearing, it worried that broadly recognizing this could lead to side effects such as "gap investment"—buying homes with jeonse leases without actually residing in them—in areas like Seoul. However, because this issue generates the most complaints, room for adjustment during the legislative process remains. Ultimately, criticism arises that preparation time was insufficient compared to the anticipated fallout. An Individual Savings Account (ISA) features the advantage of exceptional tax-free benefits. This is because even after the mandatory three-year holding period, net profits up to 2 million won are tax-free, and remaining net profits are taxed at 9.9%, lower than the financial income tax rate of 15.4%. Joined by the tax deferral effect when extending maturity, it has gained popularity among office workers and young investors. Backlash grew as the government's reform plan prevented rolling over the 20 million won annual contribution limit into the following year and capped maturity at a maximum of five years. Complaints asked, "Why change the promised benefits?"

On top of this, the newly proposed "Productive Finance ISA" offered full tax exemption on interest and dividend income, but limiting investment targets exclusively to domestic stocks and domestic stock funds sparked considerable backlash. In particular, with volatility in the domestic stock market causing losses for many investors and driving up the scale of investment by "Seohak Ants" (Korean retail investors in overseas markets) seeking refuge, the move appeared to pressure investment in the domestic stock market at a time when government responsibility was being raised. Analysis is dominant that the president stepped in to order a full review largely because resistance among the younger demographic was particularly strong. Given this situation, adjustments are likely to be made to maintain existing ISA account benefits, but damage to the overall credibility of the tax reform plan is inevitable.
As public opinion on the tax reform plan became unsettled, the Ministry of Finance and Economy held a series of briefings with journalists last week to explain its intent and background. Among the questions were those asking, "While saying this is not a real estate measure, isn't the government trying to do too much through taxation?" and "Has the government anticipated a significant portion of the impacts this policy will bring?" A key question was, "If there were policy intents and guidelines from the Presidential Office, which of the Ministry of Finance and Economy's opinions were reflected in the discussion process?"

The big picture of this reform plan is interpreted as shifting the taxation standard for real estate from the "number of homes" to the "value of homes," and achieving fair taxation by strengthening taxes on non-resident home ownership and ultra-high-priced homes. In that it fundamentally alters long-standing principles, one cannot shake the feeling that it was too much for policy bureaucrats to handle such a massive change in a short period. Because the contents are complex and give rise to various scenarios, speculation suggests that makeshift prescriptions—adding "deferrals" or "exceptions" where side effects were anticipated—were unavoidable. In short, policy could hardly keep pace with the overspeeding of politics. In this process, were the reality checks and opinions of policy bureaucrats given serious weight? This is a point that must be examined before reprimanding the ministry in charge. This is because the role of politics goes beyond reading the spirit of the times, setting direction, and mediating and persuading conflicting interests, to ultimately taking final responsibility.

※ Please note: This article was translated by AI and may contain errors.