Three Actors and Three Perspectives in Property Tax Competition of Seoul Metropolitan Area

A policy phenomenon sometimes has multi-facets like a polyhedron because many stakeholders with different preferences or goals are involved in the policy process. The case of tax competition in the Seoul Metropolitan Area (SMA) is also a multi-faceted policy phenomenon. Recently the Korean central government introduced a package of tax hikes on real estate in order to achieve tax levy equity. This remarkable tax innovation, however, resulted in conflicts between three actors (the central government, residents and local governments), which were followed by an area-wide tax competition among local governments of the SMA. Under severe tax competition over the SMA, the direct impact of the tax hike policy on the property tax burden the rich group had to bear shrank to the half level the central government originally expected. Rather the tax hike policy under tax competition also resulted in unexpected inequity problems in the property tax burden occurred within jurisdictions and between jurisdictions. To analyze some interesting issues related to the three actors' behavior and interactions, this research employs three different models incorporating three different perspectives of the three actors: Median Voting, Delegation and Implementation, and Strategic Tiebout Tax Competition Models. Based on the Median Voting model, this research first examines the process of how the residents influence the local governments in the chapter 2. Supposing that preferred tax rates by median-wealth residents with small/middle sized house or condominium are lower than the recommended tax rate, the pre-electoral competition model implies that the tax competition of SMA will result in the property tax cuts. Since the house or condominium is the most valuable asset to the median-wealth residents in some local jurisdictions, the median-wealth residents strongly request for the residential property tax cut, responding the tax rate cuts in the local rich jurisdictions. Second, the Delegation and Implementation model analysis will examine: (1) why the local governments cut the property tax against the tax hike policy of the central government in spite of the expected sanctions. A trade-off condition between the tax revenue and pre-electoral benefit implies that the local governments will have the quadratic utility or preference function. Also the median-wealth residents also face the trade-off between the public goods and the tax burden, and the central government is supposed to look for the optimal property tax rate which will satisfy their goal for the fair redistribution of the wealth; (2) Under equilibrium, the central government utilizes its fiscal discretion to prevent local governments' deviation in a strategic situation; and (3) what factors influence the use of fiscal discretion by local governments. Third, this research examines the strategic tax competition of SMA. Based on some propositions from two analyses of the median voting and implementation models, the analysis of the tax competition model will examine what determines the degree of tax cut and what influences the decision making on whether to cut the property tax or not. Using a spatial econometric model, this research provides empirical evidence to support the causalities postulated in the multiple theoretical models of this dissertation. This research will first contribute to the formal model study area by enriching the empirical research literature of formal modeling. Finally, the research is expected to show that the models developed by the American or Western European scholars are applicable to the analysis of the Asian cases under some conditions.