Minggu, 12/10/2008

Tax cuts to boost property market

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Tax cuts to boost property market

Some countries in Asia have cut property taxes so as to boost their domestic property market that has become slow due to the global financial crisis. Again, property has proven to be the locomotive of a country’s economy. How big tax cuts can provide a solution and at the same time help jack up the performance of the property industry in Asia?

At least three countries in Asia have cut property taxes as a way to reinvigorate their property markets. They are South Korea, Hong Kong and Thailand. At the moment, South Korea’s property growth seems to be slowing down. In Semester I-2008, for example, the number of newly built homes dropped drastically, namely by 32 percent, from the corresponding period of last year.

The six-month old administration of President Lee Myung Bak is facing administrative problems and slowing economic growth. This situation troubles property players because the number of unsold property has continued to rise due to banks tightening their loans for property ownership.

All this explains why the Thai government issued a policy to cut income taxes beginning next year with an aim to get property development back to normal. Chun Ching Woo, an economist of SC First Bank Korea Ltd. In Seoul said “The government is cutting taxes to support the economy by surprising domestic demand.”

Meanwhile, South Korea’s ministry of finance said property tax cuts would cause the country lose income of 2.2 trillion won or around US$1.9 billion within the next two years. The government will reduce property taxes in the residential sector to 0.5-1 percent from the current rates of 1-3 percent. Tit will also cut the taxes of property used by the business sector to 0.5-0.7 percent from the current 0.6-1.6 percent.

The new tax policy will go into effect next year. As a matter of fact, the idea of cutting property taxes was raised and discussed in 2005. It was then suggested that the government impose tax on homes worth 900 million won. Previously, the government taxed homes priced at more than 600 million won. This policy clearly stirred criticisms from homeowners, especially medium class people who were obliged to pay two times.

Tax cuts exactly benefit medium class homeowners. Lim Jiwon, an economist of JPMorgan Chase & Co in Seoul, said: “The policy changes will reduce the tax burden and may help improve taxpayers’ confidence and spending. It may help stabilize the property market.” The Hong Kong government has cut income tax and company profit tax although its property market is not in a distressful situation at this time. Income tax was reduced from 16 percent to 15 percent while corporate profit tax was cut from 17.5 percent to 16.5 percent. This move was meant to anticipate the crises that had hit property markets in many countries.

Tax cuts in Hong Kong also aimed to create more competitive local and international markets. They were also expected to boost consumption and investment in Hong Kong. Low taxes will allow a rise in personal and corporate income, which could boost investments in the property sector because the government also cut property ownership tax. Meanwhile, the Thai government in March 2008 slashed property taxes, from 3 percent to 0.1 percent. The interior ministry also reduced to 0.01 percent taxes on land transactions, houses, office buildings and condominiums.

The tax reduction has proved to be effective. A broker in Thailand said his property firm had succeeded to raise its sales by 14 percent if it could save 4.3 percent of its tax income. Basically, tax cuts aim to increase state income and the income of property firms. With tax reduction corporate income or personal income will rise.

As such, any individual or company will have more funds for investment especially in the property sector. Reduced taxes also will cause a drop in property prices, and this could encourage more people to buy property. More people investing their money in property will greatly help improve the condition of property markets. And, property taxes in turn will crease state income. The government can use state funds from taxes for many purposes, which eventually will enable the country to compete with other countries in the international arena. (NS)