Time for fair — not punitive — taxation

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Time for fair — not punitive — taxation

Published: 05 Nov. 2024, 19:28 Updated: 05 Nov. 2024, 19:29

The opposition Democratic Party (DP) agreed to back the government’s proposal to undo a new tax planned for next year to levy on incomes from financial investments, which had been packaged when it was the governing party. DP leader Lee Jae-myung proposed going along with the government in respect to the difficulties of the stock market. The lifting of the tax boosted market sentiment, sending the Kospi up 1.8 percent and the Kosdaq up 3.4 percent.

Under the tax scheme, annual capital gains of more than 50 million won ($36,000) from stock, bond and fund investments would be subject to a 20 percent tax while gains of more than 300 million won would invite a 25 percent tax. Until now, except for large shareholders owning 5 billion won worth of stocks or a stake of up to 4 percent, gains from stock investments has been tax-free. Shareholders merely had to pay the transaction tax when selling the shares. The new tax category was passed in a bipartisan agreement in 2020 to take effect from 2023, but it was put on hold for two years under Yoon Suk Yeol’s presidency. During his term, the issue had been a sticking point between the rivalling parties. The governing People Power Party (PPP) argued the tax could scare away investors, while the DP disagreed with the abolishment of the “rich tax.”

The removal of the uncertainty and tax risk will act positively for the stock market. But it comes with a trade-off of surrendering the basic tax principle of imposing taxes on any income. It is suspected of a populist move to appease 14 million retail investors. Those facing the tax make up just 150,000 or 1 percent of individual investors. But the expected exit of big investors scared other investors, as it may cause havoc on the market.

The change of plan also can cause a toll on the fiscal balance. The government had proposed to lower the securities transaction tax rate in phases from 2021 to offset the burden from the financial investment tax. The rate came down from 0.23 percent in 2021 and will fall further to 0.15 percent next year. The tax rollback reduced tax revenue by as much as 2.2 trillion won annually between 2021 and 2023. With the axing of the financial investment tax, the revenue of an estimated 1.5 trillion won per year would be lost. The loss serves poorly for the fiscal balance since the government estimates a tax shortfall of 30 trillion won this year after last year’s record 60 trillion won.

But there is no use talking about the pros and cons of a tax that is no more. The government must redesign the overall tax code on financial investments based on reason. It must not be punitive toward the rich but anchor it on fair guidelines and principles to persuade taxpayers and raise the appeal of the Korean stock market.