[THE VIEW]Is Abolishing the Financial Investment Income Tax Desirable?

Concerns Over Untaxed Capital Gains
Potential Issues With Tax Fairness

Recently, Lee Bok-hyun, Governor of the Financial Supervisory Service, expressed a negative view on the postponement of the financial investment income tax (Fintax) and once again sought to support the Yoon Seok-yeol administration's efforts to abolish the Fintax. The Fintax is designed so that when an individual realizes profits exceeding 50 million KRW from investments such as stocks, bonds, and derivatives, they pay a 20% Fintax and a 2% local income tax on the excess amount, and for profits exceeding 300 million KRW, a 25% Fintax and a 2.5% local income tax on the excess amount. Therefore, most small investors are not subject to this tax, and it only applies to individuals with large capital gains.

The introduction of the Fintax is closely related to the reduction or abolition of the existing securities transaction tax. The securities transaction tax, which must be paid every time a transaction occurs, applies to small investors as well, and taxes must be paid even when assets are liquidated at a loss. Therefore, instead of reducing or abolishing the securities transaction tax, taxing individuals who make significant profits through securities trading aligns with the principle of taxing where profits exist.

Furthermore, the factors necessary for corporate activities and production can be broadly divided into capital and labor. Currently, labor income is taxed through the earned income tax, which applies progressively to individuals with a certain level of earned income. Without the introduction of the Fintax, capital gains from capital would not be taxed, which could raise issues of tax fairness.

On the other hand, those advocating for the abolition of the Fintax are concerned about an overall market crisis due to decreased attractiveness of the stock market. Since the stock market is heavily influenced by individuals with large capital, they argue that implementing the Fintax could lead major investors to withdraw from the domestic stock market, causing market stagnation.

However, this argument has problems. The securities transaction tax also reduces the attractiveness of the domestic market, and the abolition of the securities transaction tax combined with the introduction of the Fintax has a somewhat offsetting effect. Additionally, since the Fintax does not apply to institutional investors, the abolition of the securities transaction tax could make the market more attractive to them.

Of course, concerns about the stability and development of the financial market may exist. But these can also be overcome with some adjustments. In the United States, there is a capital gains tax, where income from short-term investments held for less than one year is included in comprehensive income tax and generally taxed at a higher rate, while income from long-term investments held for more than one year is taxed at a much lower rate, providing investors with incentives to invest long-term and stably.

The Fintax alone should not be seen as lowering market attractiveness and causing problems. Various issues are intertwined, including domestic political and policy instability, domestic and international interest rate hike or cut plans, and international geopolitical issues. Some mention the sharp stock market crash following the introduction of the securities transaction tax in Taiwan in 1989, but at that time, Taiwan faced conflicts with China, political instability in the Asia-Pacific region, and changes in the international economy after Black Monday in 1987. The situation then and now differs in many respects.

Park Sung-kyu, Professor at Willamette University, USA