[Inside Chodong] Tax Resistance and the 5000-Point KOSPI

On January 2 of last year, three months before the general election, former President Yoon Suk Yeol, while still in office, became the first sitting president to attend the Korea Exchange’s stock market opening ceremony and announced the abolition of the financial investment income tax. This was an unexpected announcement that had not been scheduled in advance. On the same day, the Ministry of Economy and Finance held a pre-briefing on the 2024 Economic Policy Direction, but the published tax reform plan did not include any mention of the financial investment income tax. As major economic policies bypassed the relevant ministries and were instead announced directly by the president, criticism arose that these were populist measures aimed at the general election. It was also at this time that the government reversed the gradual lowering of the major shareholder threshold for capital gains tax that had been implemented by previous administrations, and introduced a series of stock market policies welcomed by retail investors, such as lowering the securities transaction tax and banning short selling.

The first tax reform proposal from the Lee Jae-myung administration, which seeks to reverse the Yoon administration’s stock market tax cuts, has faced strong tax resistance from retail investors. The proposal would lower the threshold for being classified as a major shareholder from 5 billion won to 1 billion won per stock, and restore the securities transaction tax rate, which had previously been reduced based on the planned introduction of the financial investment income tax. Given that the tax burden ratio has regressed to the level of eight years ago, there is an unavoidable need to raise taxes in order to overcome fiscal difficulties and secure resources for expansionary fiscal policy. However, whether it is the government’s proposal or the original plan being discussed by senior party and government officials, simply returning to the old tax system is not the answer.

The capital gains tax on stocks has always been a tax category that was difficult to collect. Major shareholders, who are subject to the tax, account for only 0.04% of all stock investors, and often sell off their shares temporarily just before the year-end taxation date to avoid the tax. Since the major shareholder threshold is set at 5 billion won or more per stock, someone could hold nearly 50 billion won in total by spreading 4.99 billion won across 10 different stocks and pay no tax at all. In contrast, holding just one stock worth 5 billion won would subject the investor to a capital gains tax of up to 33% on trading profits. It is difficult to see this as a fair and reasonable tax system.

The same applies to the transaction tax, which also affects retail investors. Last year, individual investors in the Korean stock market suffered losses of -17%, which was even greater than the decline in the KOSPI index. Nevertheless, the government collected 4.8 trillion won in transaction taxes. Major shareholders are subject to double taxation, paying both capital gains tax on profits and transaction tax on sales, and in some cases, they must pay taxes even when they have incurred losses rather than income. This is an unreasonable structure.

The introduction of the financial investment income tax was pursued as a way to resolve these issues at once, but the Yoon administration declared its abolition for political purposes, and even the Democratic Party of Korea, which had drafted the bill, reversed its stance and supported the move, resulting in the tax never being implemented. As the fundamental principle of taxation?“where there is income, there is tax”?continues to be set aside for political reasons by successive administrations, exceptions have become the norm.

Above all, it is difficult for the Lee Jae-myung administration to avoid criticism for fueling controversy by making the highly volatile stock index an explicit economic policy target. Achieving KOSPI 5000 should be the result of economic growth, not a policy tool in itself. The fierce tax resistance from 14 million retail investors following the government’s tax reform announcement is the result of expectations fostered by the president’s pledge of “KOSPI 5000 and an era of stock investment for all citizens”?that the government would do something to prevent the value of their stocks from falling. In other words, KOSPI 5000 has become a shackle on state governance. Neither a return to the unreasonable tax systems of the past nor a compromise aimed at winning retail investor votes is the right path for a government that claims to be normalizing taxation. Before it is too late, the government must pursue genuine tax reform toward universal income-based taxation.

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