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Lin Chieng-fu: The time is ripe for a consolidated real estate tax
Taiwan News, Staff Writer
2014-07-11 11:52 AM
According to the Economic Daily News contributor and professor of economics at National Taiwan University Lin Chieng-fu, in order to prevent a massive flow of capital and resources into the real estate market causing a wave of speculation and spiking property prices, Academia Sinica recently published its “Tax Reform Policy Proposals” suggesting a consolidation of property and land taxes and actual selling price taxation. Finance Minister Chang Sheng-ford also presaged, “consolidation of property and land taxes requires actual selling price taxation.” In the future, under the condition of maintaining the increment tax on land value in its current form, a “real estate transaction income tax” should be levied according to actual profit derived from the total consolidated actual selling price for property and land minus actual acquisition costs in order to establish a sound real estate transaction taxation system.

According to the housing affordability index published by the Construction and Planning Agency in Q4 2013, the housing price to income ratio in Taipei City has reached 15.01, the highest in the world. New Taipei City’s ration is also as high as 12.67, third in the world. The government must be determined to remedy this real estate chaos by providing solutions for core issues. Lin believes “consolidation of property and land taxes requires actual selling price taxation” is the best policy.

Looking at the experience of neighboring countries, South Korean housing prices began to soar in 2000. In 2003, South Korea adopted a two-pronged approach of, one, raising the country’s capital gains tax to 60% and, two, “constructing 1 million units of low cost housing” for rent. However, this only served to stabilize the real estate market and housing prices still edged upwards. In 2005, South Korea proceeded to improve its taxation system by renaming the originally separately taxable land and property holding tax as a “consolidated real estate tax” levied as a comprehensive unit. The government also imposed an “additional” tax with a progressive tax rate of 1% to 3% on high priced land and property. In 2007, the South Korean government further adopted “actual selling price taxation” on its real estate transaction tax and levied heavy taxes on owners of multiple properties to reduce real estate speculation. This series of policies served to rationalize South Korea’s real estate market. This demonstrates a “consolidated property and land tax and actual selling price taxation” is a practice that can curb soaring housing prices which also conforms to equality and justice.

Currently, Taiwan’s real estate tax burden is divided into a transaction and holding tax. In the transaction tax portion, land and property are taxed separately. Land is assessed an increment tax on land value according to announced present value while property tax is based on actual selling price or appraised value. The holding tax is based on appraised value and land value tax is based on announced land value.

This system of separate land and property taxes creates a real estate market phenomenon of “land with three prices” in Taiwan. The property tax, land value tax, and increment tax on land value must be based separately on the present assessed value, announced land value, and announced present value published by the government. However, these three prices are not actual prices, frequently deviate from market standards, and cannot truly reflect the tax burden. Taiwan’s actual price registration system has been implemented for some time and has accumulated a certain amount of information. Lin feels the time is ripe for a “consolidation of property and land tax” and “actual selling price taxation.”

If “consolidated property and land tax and actual selling price taxation” is only applicable as a transaction tax, since real estate transaction taxes are a one-time tax only incurred when trading or transferring property, it will not affect personal use and long term owners. This tax would primarily impact consortiums and speculators. Increment tax on land value would still be levied according to the announced present land value but when declaring personal income tax the following year, income from the property transaction must be declared according to the actual selling price. The increment tax on land value originally paid can be listed as a deductible. The higher the real estate transaction income, the higher the applicable income tax rate will be which conforms to the principle of fairness. Lin suggests that, with the exception of inheritance, no exemptions be provided to trading, liens, exchanges, and partitioning to reduce potential loopholes compromising the spirit of the policy. The luxury tax should also make a timely exit.

However, if this policy is widely applied to general holding taxes including the property tax and land value tax the impact will be great and the policy must possess comprehensive supporting measures. In order to avoid harming the innocent and adhere to the principle of targeted and localized increases in the tax burden, exemptions should be set precluding owner-occupied housing and farm use buildings. Or, lower the owner-occupied tax rate to no more than the tax currently paid, in principle, to ensure the rights of all residents and minimize potential impact. The principle for non-personal use property will be taxation based on actual selling price at the standard tax rate. Only this method can effectively increase holding costs and speculation obstacles for non-personal use property purchased by investors.

In order to put an end to real estate speculation, tax reform cannot be postponed. As even big business is seizing land profits at the expense of production, if this trend is not corrected the future will be in peril. Moving forward, Lin wants the government to show courage and wisdom in planning, legislating, and executing a “consolidated property and land tax and actual selling price taxation” to allow the public to feel that the government’s resolve in implementing “residential justice” is the key to success.

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