The populism surfacing before the election

In another move perceived as a vote-appealing attempt, the government is easing taxes on wealthy shareholders. The threshold for capital gains tax will leap from 1 billion won ($775,000) to 5 billion won. Currently, a shareholder holding a certain item worth more than 1 billion won or a certain stake threshold (1 percent for the Kospi, 2 percent for the Kosdaq, and 4 percent for the Korea New Exchange) is levied with a 20 to 25 percent tax. Those subject to the tax in 2021 numbered 7,000, or about 0.05 percent of stock investors. Since the benefit goes to the uppermost stock-rich, the move can be seen as a tax break for the wealthy.

Big shareholders often go on selling sprees towards the end of the year to lower their holdings below the threshold, damaging small investors. Major shareholders repurchase their stocks the following year. Finance Minister Choo Kyung-ho said just 10 days ago that the government was not considering raising the capital gains tax threshold. It is no wonder that the government is losing confidence in the market.

The measure goes against the core principle of taxing where income is made. Governments in the past — both liberal and conservative — have lowered the ceiling for capital gains tax. The threshold dipped to 1 billion won for an item in 2019 from 10 billion won in 2000. The latest move will likely worsen the already-thinning tax collection base. The opposition Democratic Party (DP) estimates that 700 billion won could be lost through the tax easing on the stock-rich. The latest decision appears to be a populist move through financial policy following the government’s full ban of short sales, which cut against global standards.

Last week, big commercial banks also announced a plan — amid government pressure — to reimburse 1.87 million self-employed borrowers for between 850,000 and 3 million won in interest collection. The combined relief amounts to 2 trillion won, about 10 percent of the banks’ estimated net profit for 2023, giving it a similar effect to the DP’s proposed “windfall tax” on banks that enjoyed extraordinary profits from the spike in interest rates. The government insists that the move is a voluntary action from banks.

But arm-twisting behind closed doors could leave a bad precedent. Banks claim the returns would be realized around February or March, which coincidentally fall before the April 10 parliamentary election. Some suspect the ruling front is using banks for vote-buying cash handouts to help the governing People Power Party’s campaigns. Tax breaks to arbitrarily prop up stock prices and pressure private banks to spit out their profits cannot comply with free-market principles. Populism only ruins the economy.