The Korean Journal of Economic Studies
Housing Market Responses to the Discontinuity of Aquisition Taxes
Man-Soo Joo (Hanyang University), Sungho Yun (Hanyang University)Year 2016Vol. 64No. 1
Houses purchased in Korea at prices above 0.6 billion won or 0.9 billionwon are subject to higher tax rates imposed on the full value of thetransaction. This policy generates discontinuities (“thresholds”) in the overalltax liability. Based on Kopczuk and Munroe(2014), we analyze theoreticallythe effects of the discontinuities in the housing market. We show that a highertax rate above a threshold results in substantial bunching in transaction on thethreshold as well as a reduction in transaction volume above it. The reductionin transaction volume is large just above the threshold and then graduallydecreases as the price goes up from the threshold. The tax burdens thatbuyers shift to sellers is generally larger when the seller’s bargaining power isbigger and when the difference of reservation prices between buyers andsellers is bigger. The seller’s tax burden is very large just above the thresholdbecause the house price will go down to it after tax. The analysis of thehousing transaction data set of Seoul, Korea during 2011-2013 confirms theresults that the theoretical model leads to. Based upon the analysis, wepropose a proportional tax to improve economic efficiency and to reducedistortion in the distribution of tax burdens.