[Inside Chodong]Individual Investors Leaving the Stock Market and the Financial Investment Income Tax

Democratic Party to Hold Policy Debate on Financial Investment Income Tax on the 24th
Confusion Grows Ahead of FIIT Implementation in January
Individual Investors Turn Away from Domestic Market Amid FIIT Uncertainty

[Image source=Yonhap News]

Recently, investors' attention has been focused on the political arena due to the Financial Investment Income Tax (FIIT), a hot topic in the financial investment industry. The ruling Democratic Party of Korea, which holds the key to legislation, plans to hold a public debate on the FIIT on the 24th, followed by a policy members' meeting to decide the party's stance. The debate will be divided into two teams of five members each: the 'Postponement Team' and the 'Implementation Team.' The Implementation Team is expected to argue for enforcing the FIIT as scheduled but with supplementary measures, while the Postponement Team is likely to advocate for delaying the implementation until the stock market situation improves, asserting that it would not be too late to implement it later.

The FIIT is a system that imposes a tax rate ranging from 22% to 27.5% on income exceeding 50 million KRW generated from financial investments such as stocks, bonds, and funds. Originally, the related bill was passed in 2020 through bipartisan agreement and was scheduled to be implemented last year. However, due to sluggish stock market conditions and backlash from individual investors, the implementation was postponed for two years until January next year. As the postponement deadline approaches in a few months, the FIIT has once again become a 'hot potato' in the stock market.

The current controversy and confrontation surrounding the FIIT seem familiar, as a similar situation occurred three years ago during the previous postponement. Back then, the ruling and opposition parties were sharply divided over whether to postpone, and the postponement was decided just ten days before the scheduled implementation. It is quite possible that the same path will be followed this time, given the strong opposition from individual investors. These investors criticize the FIIT as a 're-taxation' and have raised their voices against it, with individual investor groups organizing candlelight protests opposing the FIIT. Additionally, the sluggish stock market conditions that contributed to the postponement three years ago persist today, with the market trapped in a box range and showing a stagnant trend. Earlier, Kim Min-seok, a senior member of the Democratic Party, stated on Facebook on the 19th that "the implementation of the FIIT should be postponed for about three years to allow time for stock market reform and stimulus verification." If the FIIT is postponed for about three years this time, it is almost certain that the current confusion will reignite after three years.

Above all, the problem is that the ongoing political disputes over whether to implement the FIIT are increasing uncertainty in the stock market. This is becoming a continuous negative factor for an already vulnerable market. The KOSPI has fallen by 2.33% since the beginning of this year. During the same period, the U.S. S&P 500 and Nasdaq rose by more than 19%, respectively. Japan's Nikkei 225 index increased by nearly 13%, Hong Kong's Hang Seng index by 7%, and Taiwan's Taiex index by 23%. While major global stock markets recorded double-digit gains, the KOSPI alone showed a downward trend.

As a result, among individual investors, a self-deprecating phrase has emerged: "Escaping the national stock market is a matter of intelligence." This implies that since there is no hope in the domestic stock market, it is better to quickly exit and move to U.S. stocks. According to the Korea Exchange, the average daily trading volume in the domestic stock market fell from the 19 trillion KRW range in January this year to the 16 trillion KRW range this month. On the other hand, overseas investment is steadily increasing. According to the Korea Securities Depository, the amount of foreign currency securities held by domestic investors in the first half of this year reached 127.3 billion USD, a 22.2% increase compared to the second half of last year, marking an all-time high.

In a situation where domestic investors are gradually turning their backs on the domestic stock market, the FIIT should not become a factor that suppresses the market. It is hoped that the policy debate on the 24th will produce measures to quell the current confusion.