[Initial Moment] Plucking Goose Feathers

“Big Players” Get Tax Cuts from Transaction Tax Reduction

Individuals Face Tax Hikes with Introduction of Capital Gains Tax

[Asia Economy Reporter Koh Hyung-kwang] "Proper tax collection is like plucking as many feathers as possible from a goose while making it scream as little as possible."

This is a saying left by Jean-Baptiste Colbert, the finance minister during the reign of Louis XIV in 17th century France. It is often cited when discussing tax increases. The goose represents the people, and the feathers represent taxes. The message warns that if you pluck the feathers too aggressively out of greed for tax revenue, the goose will resist, so tax rates should not be raised abruptly nor tax items increased recklessly.

In the domestic stock market, which has been heated up by the “Donghak Ant Movement,” the “geese” are screaming loudly. The government has slightly lowered the securities transaction tax, which it had planned to abolish entirely, and introduced a new capital gains tax, aiming to collect a large amount of revenue.

According to the recently announced “Tax Law Amendment,” from 2023, individual investors who are not major shareholders will have to pay a 20% capital gains tax on profits exceeding 50 million KRW. The securities transaction tax will gradually decrease from the current 0.25% to 0.23% in 2021 and 0.15% in 2023, but there is no mention of abolition. If an investor earns more than 50 million KRW in stock profits, they will have to pay both the existing transaction tax and the newly introduced capital gains tax, making “double taxation” unavoidable.

The securities transaction tax is levied proportionally on the sale price of stocks, so it must be paid even if the investor incurs a loss. This has consistently been criticized for violating the tax principle that “taxes should be levied where there is profit.” However, with the government imposing capital gains tax without abolishing the transaction tax, individual investors are literally “boiling over.”

The government argues that the transaction tax is a tax on transactions, while the capital gains tax is a tax on income, so the subjects of taxation differ and it is difficult to consider it double taxation. It also claims that abolishing the transaction tax would lead to frequent trading and market instability. The government also stated that those subject to double taxation on profits exceeding 50 million KRW account for about 150,000 people, or the top 2.5% of all individual investors, so it is not a significant problem.

However, this is only the government’s perspective. Institutional investors, who only pay corporate tax, and foreigners, who pay most of their taxes in their home countries, are exempt from capital gains tax. With this tax reform, the “big players” in the stock market benefit from tax cuts due to the transaction tax reduction, while the “ants,” the weaker individual investors, face tax hikes with the introduction of the capital gains tax on top of the transaction tax. It is as if the government has shifted the shortfall in tax revenue from the big players onto the ants. From the individual investors’ point of view, it is a serious betrayal.

The government has actively defended the introduction of the stock capital gains tax by saying it is a case adopted by advanced countries, but upon closer examination, the argument is weak. The countries mentioned by the government, such as the United States (15?20%), Japan (20%), and Germany (25%), impose capital gains tax but do not have a securities transaction tax. Conversely, Hong Kong, Thailand, and Singapore have no capital gains tax but only a transaction tax (0.1?0.2%). Of course, a few countries like the UK and France collect both capital gains tax and transaction tax, but these are wealthy European countries with GDPs far exceeding ours.

The reason the government clings to the transaction tax despite weak excuses is greed for tax revenue. The securities transaction tax has been a stable source of revenue, collecting about 5 trillion KRW annually on average over the past three years. This year, with a surge in stock trading, it is nearly doubled. From the government’s perspective, abolishing the transaction tax would mean giving up trillions of won in tax revenue. Holding onto one’s own while taking more from others is nothing but thievery. Even Choi Un-yeol, a former Democratic Party lawmaker who chaired the National Assembly’s Capital Market Special Committee until early this year, said, “Transaction tax and capital gains tax are substitutes, so usually only one is kept abroad,” and “If a capital gains tax is newly introduced, abolishing the transaction tax completely is the right approach.”

Taxation should be conducted at a level that the taxed citizens can endure and trust. The government should take this opportunity to reflect once again on why Colbert’s words about plucking goose feathers have been echoed for centuries.

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