By Yoon Ja-young
Staff Reporter

The state-run economic think tank Korea Development Institute said Wednesday that the country should double real estate taxes and slash income taxes, calling for an overhaul of the current tax system.

Song Eui-young, an economics professor at Sogang University, said in a report submitted to the group that the current tax system could distort the market when the government eases regulations on housing.

He pointed out that while income from industrial capital is subject to tax, income from housing rent is not.

"It discourages accumulation of capital and supplies too much housing," Song said, recommending levying comprehensive income tax on the rent income, or hiking property taxes.

He said that raising property taxes and reducing income taxes enhance the effectiveness of the taxation. Moreover, it is very likely to increase benefits for the families who don't have their own homes, as well as the next generation.

He said that when the property tax rate is doubled to 2 percent, there will be more room to cut income tax rate by 6.6 percentage points ― equal to increasing the income of next generation by 9 percent, according to Song.

He added that the younger generation, who don't have to shoulder property taxes, can save more, and then buy houses later.

He referred to Milton Friedman, who said that land value taxation is the "least bad" tax.

The advice comes amid the huge fiscal deficit that the government is facing after cutting income and corporate taxes.

The government is scheduled to pull down the income tax rate to 33 percent from 35 percent, while the United States and the United Kingdom are raising their income tax rate ceiling.

According to the Ministry of Strategy and Finance, the cuts are expected to amount to 35 trillion won by 2012.

The state debt is estimated at 366 trillion won, equal to more than 35 percent of GDP.

chizpizza@koreatimes.co.kr