[The Editors' Verdict] Abolishing the Financial Investment Income Tax and Neglecting the Transaction Tax...A Step Back from Global Standards

Major Countries Tax Only Capital Gains, Not Transaction Tax
Investors Pay Transaction Tax Even When Selling at a Loss
Weak Corporate Governance and Inconsistent Capital Market Policies Are the Real Issues

President Yoon Suk-yeol is speaking at the "Public Discussion on Livelihood with the People - Fourth Session, Coexistent Finance, Expanding the Ladder of Opportunity" held at the Korea Exchange in Yeouido, Seoul on the 17th.
[Image source=Yonhap News]

From the very beginning of the new year, the president declared the abolition of the financial investment income tax (Geumtu Tax). For the first time as a sitting president, he attended the Korea Exchange stock market opening ceremony and made a shocking statement. He visited the exchange again on the 17th. He chose the venue to preside over the 'Fourth Public Livelihood Discussion with the People' and receive a work report from the Financial Services Commission. On this day, President Yoon Seok-yeol once again emphasized that he would push forward the abolition of the Geumtu Tax as a policy agenda.

The Geumtu Tax is a system that imposes taxes on financial investment income exceeding 50 million won. It was passed by the National Assembly at the end of 2020 during the Moon Jae-in administration. It was scheduled to be implemented in 2023, but at the end of 2022, the Yoon Seok-yeol administration announced a postponement of implementation, and the Democratic Party, mindful of investor backlash, agreed to delay it for another two years until 2025.

It took a full 30 years to introduce the Geumtu Tax. As the number 30 suggests, tax policy is not easy to agree upon, and numerous debates are inevitable. Creating a single tax policy requires continuous discussion and social consensus.

President Yoon cited resolving the Korea Discount and aligning with global standards as reasons for abolishing the Geumtu Tax, but the economic policy direction announced by the government on the 4th did not include any mention of the Geumtu Tax. It was also absent from the national agenda materials. Ultimately, this suggests that without sufficient discussion with related ministries, the so-called 'passing over' and impulsive 'election vote-seeking' remarks were made. The administration, which was criticized for hiding national debt due to tax revenue shortages, pushing through amendments to the Income Tax Act to abolish the Geumtu Tax suddenly is inevitably criticized as 'legislation for election purposes.'

Moreover, while the Geumtu Tax is to be abolished, the securities transaction tax remains. The transaction tax, which had been gradually reduced on the premise of introducing the Geumtu Tax, raises controversy due to the lack of a clear direction on whether it will be restored. In response, the Financial Services Commission stated in its work report that the transaction tax will continue to be gradually reduced as before.

Statistics over the past 10 years show that only about 150,000 investors benefit from the abolition of the Geumtu Tax, which is merely 1% of all investors. In other words, this is irrelevant to 99% of investors. If the policy were truly for the 14 million individual investors, it would have been more logical to keep the Geumtu Tax and abolish the transaction tax paid by all investors.

The transaction tax must be paid even when stocks are sold at a loss. Accordingly, major countries worldwide are moving toward abolishing the transaction tax and taxing capital gains income instead. This follows the tax principle of taxing income. Also, taxing both capital gains and transaction tax leads to double taxation controversy. This is why most OECD member countries such as the United States, the United Kingdom, Japan, and Germany tax capital gains instead of transaction taxes.

The president is throwing out policies to win the favor of retail investors as if giving charity. The first was the ban on short selling, the second was easing the stock capital gains tax (based on major shareholders), and the third is abolishing the Geumtu Tax. Compared to the actions of major countries worldwide, 'abolishing the Geumtu Tax while neglecting the transaction tax' goes against global standards. It is inconsistent government policies such as banning short selling that cause the Korea Discount and hinder the advancement of the capital market. Although 'poor governance,' where small shareholders are chronically sacrificed, is cited as a weakness of the capital market, the government is also pushing to ease the capital gains tax criteria for major shareholders. Blatantly so.