OECD: "Korea Should Lower Transaction Taxes and Raise Holding Taxes on Real Estate" (Comprehensive)

OECD Economic Survey Released on July 2

Set Medium-Term Fiscal Targets to Address Population Aging

Recommend Raising University Tuition and Reducing Local Education Grants

Performance-Based Wage Reform Proposed to Improve Dual Labor Market

As the Lee Jaemyung administration prepares to overhaul the real estate tax system, the Organisation for Economic Co-operation and Development (OECD) has recommended that South Korea shift its property taxation from a transaction-based system to one centered on holding taxes. In addition, the OECD advised the country to raise the pension eligibility age to address fiscal risks stemming from low birth rates and an aging population, to relax employment protection for regular workers in order to improve the dual structure of the labor market, and to transition to a performance-based wage system.

On July 2 (local time), the OECD released its "OECD Economic Surveys: Korea 2026," which includes these recommendations. The OECD examines the economic trends of its member countries every two years and publishes country-specific reports containing policy analyses and recommendations.

Apartment complexes around Dongtan Station in Hwaseong-si, Gyeonggi-do on the 30th. On this day, the Ministry of Land, Infrastructure and Transport announced the new designation of Dongtan District in Hwaseong-si, Giheung District in Yongin-si, and Guri-si as regulated areas (adjustment target areas and speculative overheating districts). Yonhap News

"Korea's Share of Holding Taxes Is Half the OECD Average...Corporate Income Tax Should Be Unified"

In the area of tax reform, the OECD pointed out issues with South Korea's property tax system. While Korea's total property tax revenue is high compared to other OECD countries, the proportion of "holding taxes," which cause less economic distortion, is excessively low. In fact, holding taxes account for only 29.4% of Korea's property tax revenue, just about half of the OECD average of 56%. The OECD explained that "a revenue-neutral shift that reduces the proportion of transaction taxes and increases the share of holding taxes will support residential mobility, enhance labor market efficiency, and ease frictions in the housing market." The OECD also observed that increasing the holding tax rate on non-owner-occupied homes could make the tax system more progressive. Furthermore, it added that any expansion of holding taxes should be carefully designed, taking into account the unique characteristics of Korea's housing market. The OECD emphasized that "such reforms will contribute to a more efficient and resilient housing market."

Additionally, the OECD recommended that Korea move from the current four-tier progressive structure for corporate income tax to a single corporate tax rate and reduce various tax expenditures such as credits and exemptions. The report also called for broadening the income tax base by reducing the proportion of tax-exempt individuals, which currently makes up 32.5% of all workers. In the medium to long term, the OECD stressed the need to aim for uniform taxation on various types of capital gains, including stocks. It further noted that retail cigarette prices and tax burdens in Korea are lower than in major countries, recommending an increase in tobacco taxes. At the same time, it suggested closing loopholes in the business succession system that allow for the avoidance of inheritance tax, and expanding the proportion of paid allocations through auctions in the emissions trading scheme.

Direct Hit from Low Birth Rate and Aging Population...Recommendation to Raise Pension Eligibility Age by 2035

The OECD warned that urgent, medium-term fiscal consolidation measures are needed to address Korea's chronic low birth rate and aging population. It called for the establishment of medium-term fiscal targets in line with the long-term sustainability of national finances and for bold restructuring of government expenditures.

In particular, to secure the sustainability of the National Pension Service, the OECD recommended that the pension eligibility age be gradually raised by 2035, linking it to the age at which citizens pay into the pension system. It also suggested that, thereafter, both pension receipt and payment ages should be tied to life expectancy. The OECD analyzed that if the pension eligibility age is delayed to 68 by 2035 and further linked to two-thirds of the increase in life expectancy, South Korea’s GDP in 2060 would be 1.9% higher than it would be without such reforms. Although recent reforms, such as raising the insurance contribution rate from 9% to 13% of income, have postponed the depletion point of the National Pension Fund by 7 to 8 years to the mid-2060s, the OECD stressed that continued efforts are necessary.

Given that the contribution of labor to national growth is declining, the OECD also indicated the need for a comprehensive overhaul of the entire education system. It diagnosed that "while intense competition for university entrance, such as focused private tutoring, is increasing, the development of critical thinking and self-directed learning capabilities remains insufficient, causing ongoing difficulties in youth employment."

Accordingly, the OECD proposed allowing an increase in university tuition fees to enhance competitiveness, and, despite the sharp decline in the school-age population, gradually reducing the proportion of local education grants (currently 20.79% of total domestic taxes is automatically allocated to elementary and secondary education). Recently, as national tax revenues have risen due to the semiconductor boom, the controversy over this grant system has been growing.

"Relax Employment Protection for Regular Workers and Abolish Seniority-Based Pay"

Regarding labor market structural reforms, the OECD presented measures to address the dual structure (the gap between regular and non-regular workers). It proposed relaxing excessive employment protection for regular workers and expanding social insurance coverage. In particular, the OECD noted that the current seniority-based wage system encourages early retirement and discourages corporate investment in employee training, recommending a shift to a wage system linked to job characteristics and performance. Additionally, it called for abolishing mandatory retirement ages set by individual companies and gradually raising the statutory retirement age.

Meanwhile, the OECD assessed that, despite recent emergencies such as the declaration of martial law and wars in the Middle East, the South Korean economy is showing signs of recovery. Based on this, it projected that Korea's economic growth rate in 2026 will be 2.6%, with an inflation rate of 2.6%.

A government official stated, "We will closely review the policy recommendations proposed by the OECD and actively refer to them in promoting future structural reform policies, including real estate tax reform, pension, labor, and education."

This content was produced with the assistance of AI translation services.