Houses purchased in Korea at prices above 0.6 billion won or 0.9 billion
won are subject to higher tax rates imposed on the full value of the
transaction. This policy generates discontinuities (“thresholds”) in the overall
tax liability. Based on Kopczuk and Munroe(2014), we analyze theoretically
the effects of the discontinuities in the housing market. We show that a higher
tax rate above a threshold results in substantial bunching in transaction on the
threshold as well as a reduction in transaction volume above it. The reduction
in transaction volume is large just above the threshold and then gradually
decreases as the price goes up from the threshold. The tax burdens that
buyers shift to sellers is generally larger when the seller’s bargaining power is
bigger and when the difference of reservation prices between buyers and
sellers is bigger. The seller’s tax burden is very large just above the threshold
because the house price will go down to it after tax. The analysis of the
housing transaction data set of Seoul, Korea during 2011-2013 confirms the
results that the theoretical model leads to. Based upon the analysis, we
propose a proportional tax to improve economic efficiency and to reduce
distortion in the distribution of tax burdens.