Korea — Property Taxes

Structure of Property Taxes

Although taxes on real property are generally an efficient way to raise revenue, some real property taxes can become direct taxes on capital. This occurs when a tax applies to more than just the value of the land itself, such as the buildings or structures on the land. This increases the cost of capital, discourages the formation of capital (such as the building of structures), and can negatively impact business location decisions.

When a business wants to improve its property through renovations or expanding a factory, a property tax that applies to both the land and those improvements directly increases the costs of those improvements. However, a tax that just applies to the value of the land would usually not create an incentive against property improvements.

Countries that tax the value of structures and buildings, as well as land, receive the worst scores on the ITCI. Some countries mitigate this treatment with a deduction for property taxes paid against corporate taxable income. These countries receive slightly better scores. Countries receive the best possible score if they have either no property tax or only tax land.

Real Property Tax Collections

The variable “property tax collections” measures property tax revenues as a percent of a country’s private capital stock. Higher tax burdens, specifically when on capital, tend to slow investment, which damages productivity and economic growth.

Countries with a high level of collections as a percent of their capital stock place a larger tax burden on taxpayers and receive a worse score on the ITCI.

Wealth Taxes

In addition to estate and inheritance taxes, some countries levy wealth taxes. Wealth taxes are often low-rate, progressive taxes on an individual’s or family’s assets or the assets of a corporation. Unlike estate taxes, wealth taxes are levied on an annual basis. While some countries levy a comprehensive tax on net wealth, others limit their wealth taxes to selected assets, such as security accounts, financial assets held abroad, or real estate.

Countries with no type of wealth tax receive the best score, countries with wealth taxes on selected assets receive an average score, and countries with net wealth taxes receive the lowest score.

Estate, Inheritance, and Gift Taxes

Estate taxes are levied on the value of an individual’s taxable estate at the time of death and are paid by the estate itself, while inheritance taxes are levied on the value of assets transferred to an individual’s heirs upon death and are paid by the heirs (not the estate of the deceased individual). Gift taxes are taxes on the transfer of property (cash, stocks, and other property) that are typically used to prevent individuals from circumventing estate and inheritance taxes by gifting away their assets before death.

Rates, exemption levels, and rules vary substantially among countries. Estate, inheritance, and gift taxes create significant compliance costs for taxpayers while raising insignificant amounts of revenue. Countries without these taxes score better than countries that have them.

Property Transfer Taxes

Property transfer taxes are taxes on the transfer of real property (real estate, land improvements, machinery) from one person or firm to another. By disallowing deductions for prior purchases or investment costs, property transfer taxes represent a direct tax on capital and increase the cost of purchasing and disposing of property.

Countries receive a worse score if they have property transfer taxes.

Corporate Asset Taxes

Similar to wealth taxes, asset taxes are levied on the wealth, or assets, of a business.

Capital Duties

Capital duties are taxes on the issuance of shares of stock. Typically, countries either levy these taxes at very low rates or require a small, flat fee. These types of taxes increase the cost of capital, limit funds available for investment, and make it more difficult to form businesses.

Countries with capital duties score worse than countries without them.

Financial Transaction Taxes

A financial transaction tax is a levy on the sale or transfer of a financial asset. Financial transaction taxes take different forms in different countries.

Financial transaction taxes impose an additional layer of taxation on the purchase or sale of stocks. Markets run on efficiency, and capital needs to flow quickly to its most economically productive use. A financial transaction tax impedes this process.

The ITCI ranks countries with financial transaction taxes worse than countries without them.