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Stop encouraging debt-fueled investing, restart capital gains tax reform

Published: 11 Nov. 2025, 00:02

Suh Kyoung-ho

The author is an editorial writer at the JoongAng Ilbo.

At a high-level policy meeting, the government, the Democratic Party (DP) and the presidential office agreed to lower the maximum separate tax rate on dividend income to 25 percent. The administration’s July tax plan had initially proposed creating a separate taxation system for dividends with a top rate of 35 percent for high-dividend companies. Under the current system, dividend and interest income up to 20 million won ($14,000) is taxed at 14 percent, while income exceeding that amount is combined with other income and taxed progressively up to 45 percent.

A screen at Hana Bank’s headquarters trading room in central Seoul shows the Kospi, foreign exchange rate and Kosdaq index on the afternoon of Nov. 10. The Kospi closed at 4,073.24, up 119.48 points, or 3.02 percent, from the previous trading day. [YONHAP]

The idea of separate taxation for dividends is not new; previous governments have also explored it. The current system discourages corporate owners and major shareholders from paying dividends, which has contributed to Korea’s relatively low payout culture. The Yoon Suk Yeol administration promoted the policy to boost stock valuations, but the DP at the time dismissed it as a “tax cut for the rich.” The criticism has some merit: According to 2023 filings, 92.6 percent of dividend income among those subject to comprehensive taxation went to individuals earning over 80 million won annually.

Still, the benefits are clear. Introducing a lower, separate tax rate could help encourage dividend payouts and improve the culture of shareholder returns, lagging behind markets such as Britain, Germany, France and the United States, as well as Asian peers like Taiwan, Japan and China. Taiwan expanded separate taxation in 2008 and raised its dividend payout ratio from around 20 percent to over 50 percent. The potential fiscal loss for Korea is limited — between 70 billion and 140 billion won, depending on the applied rate.

It is encouraging that the DP has shown flexibility on what it once labeled a “tax cut for the wealthy.” Rejecting every growth policy simply because it may benefit the rich undermines broader economic progress. Yet the timing of the announcement — after the Kospi dropped below 4,000 — makes it look like a rushed measure to buoy markets. A senior financial official’s recent comment that “borrowing to invest can be seen as a form of leverage” already sparked controversy, as many interpreted it as a green light for debt-fueled stock trading. The Lee Jae Myung administration’s enthusiasm for market stimulus is understandable, but such messaging risks promoting reckless speculation. Just as taxes alone cannot lower housing prices, they cannot sustainably lift stock prices either. Only stronger corporate performance can.

The government should instead revive the long-delayed Financial Investment Income Tax. The system would tax annual gains from stocks, bonds, funds and derivatives above 50 million won at 22 percent, or 27.5 percent for amounts exceeding 300 million won. It was legislated in 2020 under the Moon Jae-in administration with bipartisan support and set to take effect this January, but was repealed last year amid market opposition. Most retail investors would not have been subject to the tax, yet policymakers retreated in the face of populist pressure.

Prime Minister Kim Min-seok, center, smiles with presidential chief of staff Kang Hoon-sik, left, and Democratic Party chief Jung Cheong-rae during a high-level policy meeting at the prime minister’s residence in Jongno District, Seoul, on Nov. 9. [YONHAP]

Last week, the civic group People’s Solidarity for Participatory Democracy sent an inquiry to DP Rep. Lee So-young, who previously advocated postponing the tax. In an interview with the JoongAng Ilbo last year, Lee said, “Once the Kospi stabilizes above 3,000 and moves toward 4,000, investors will accept new taxation.” The index has since surged far beyond that threshold. As Lee noted then, “Most countries introduce capital gains taxes when markets are strong.” Now is the right moment for Korea to follow suit.

A Kospi of 5,000 without the Financial Investment Income Tax would not be the same as a Kospi of 5,000 with it. The Lee Jae Myung administration should not abandon the tax reform the Moon government once touted as a symbol of fiscal modernization.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.