Stock market's biggest winner could be the government

Finance Minister Hong Nam-ki, second from left, announces the government's tax reform plans during a briefing held at the Sejong Government Complex in July last year. [YONHAP]

One of the biggest beneficiaries of a massive buying spree by retail investors last year may be the government.

According to a tax report from the Ministry of Economy and Finance on Feb. 9, the government pulled in some 8.76 trillion won ($7.92 billion) in securities transaction tax revenue last year, a 98.5 percent increase from 2019’s 4.47 trillion won.

Earnings from a special tax for rural areas amounted to 6.26 trillion won, up 59.8 percent, largely due to increase in trading. In addition to a securities transaction tax of 0.1 percent, investors pay 0.15 percent on stock sales for the special tax for Kospi stocks.

The large increase in taxes from stock trading was unexpected by the government when it was making up the budget for 2020 at the end of 2019. It anticipated a 10.3 percent increase in securities transaction tax revenue, but retail investors bought heavily when local stocks plunged in March, and the government’s projections were left in the dust.

Tax revenue from stock trading grew rapidly as small investors frequently bought and sold stocks. According to the Finance Ministry, stock trading increased by 149.5 percent last year to 5,709 trillion won, from 2019’s 2,288 trillion won.

If it wasn’t for the securities transaction tax, the government would have struggled even more than it is now as it spent more last year when total tax revenue decreased, largely due to the coronavirus pandemic.

Last year’s total tax revenue was 285.54 trillion won, a 2.7 percent decline.

The fall was mainly due to a decline in revenue from the value-added tax and the corporate income tax. The value-added tax revenue declined by 5.95 trillion won and corporate income tax revenue fell 16.66 trillion won compared to the previous year. The two categories are the largest sources of tax revenue after income tax.

Capital gains tax revenue increased by 46.9 percent to 23.66 trillion won, while comprehensive real estate tax revenue grew by 34.8 percent to 3.6 trillion won, but the growth of trading tax revenue was must faster.

Retail investors are unhappy with the securities transaction tax as they are soon expected to pay capital gains tax on stock trading as well.

Government is maintaining it will keep the securities transaction tax even if it puts into place a capital gains tax on financial investment, though it said it will gradually lower the tax rate.

The Finance Ministry had proposed tax reforms last year, with major changes including broadening of the capital gains tax.

The capital gains tax on stock investment had only applied to those considered “major shareholders” of a company. Investors with 1 billion won worth shares in a single company or with 1 percent or more of company’s total shares are considered major shareholders in the case of Kospi companies.

Government plans to impose the capital gains tax on stock investment of smaller investors as well through its tax policy reforms.

Retail investors were strongly opposed to the reform and pushed the Finance Ministry, which backpedaled.

The capital gains tax on gains from stock trading will be imposed on all investors from 2023, a year delayed from the original plan.

While the government had originally proposed it will be taxing gains exceeding 20 million won, the deduction has been upped to 50 million won. The tax rate will be 20 percent of gains. If gains exceed 300 million won, the tax rate will be 25 percent.

The government said it will lower taxes on stock trading gradually, to 0.23 percent from 0.25 percent this year, and then to 0.15 percent by 2023. However, the government doesn’t yet have plans to completely abolish the transaction tax.

“From the retail investor point of view, they will be unhappy they have to pay both capital gains tax and stock trading taxes, but [from the government’s point of view] it will be inevitable for it to maintain stock exchange tax,” said Ahn Chang-nam, a tax professor at Kangnam Univesrity.

According to Ahn, apart from it being a great income source for the government, the securities transaction tax is imposed on foreign investors despite double taxation agreements.

“Government would also think that stock trading taxes need to be in place to prevent indiscreet short-term investments,” Ahn said.

BY CHO HYUN-SOOK, KIM JEE-HEE