[Insight & Opinion] Three Perspectives on the Financial Investment Income Tax

The Government Should Prioritize Removing Outdated Financial Policies
Companies Must Strengthen Protection of Shareholder Value
Fairness Between Domestic and Foreign Investors Is Also Lacking

The stock market is a jungle. The Korean stock market resembles a battlefield. This year, the performance of our stock market has been poor globally. Amid this, the debate over the imposition of the financial investment income tax (hereinafter referred to as the "Geumtu Tax") is in full swing.

The Geumtu Tax is a financial capital gains tax levied on profits earned from financial investments such as stocks and bonds. It was scheduled to be introduced in 2023 but was postponed to January next year due to tax resistance concerns from both ruling and opposition parties. Where there is income, there is tax. This is a tax principle stated by the father of economics, Adam Smith. It is normal to tax capital income if there is a gain. The problem is that no matter how reasonable a system is, one must not disregard the maturity to accept the system and the emotional threshold of the majority. We examine three aspects showing that the introduction of the Geumtu Tax is more likely to cause losses than gains to our market.

First, from the government's perspective. South Korea is classified as an emerging market, not a developed country, in the global stock indices published by MSCI (Morgan Stanley Capital International), a subsidiary of the global investment bank Morgan Stanley. Since our financial sector is not advanced, adopting financial systems from financial powerhouses like the U.S., Japan, the U.K., and Germany is out of order. Internationally, the proportion of foreign investors who follow the MSCI index and invest in Korea is decreasing.

There was once an argument that it was better to be the "dragon's head" (MSCI emerging market) than the "snake's tail" (MSCI developed market inclusion). Now the situation is different; China and India are rising within the MSCI emerging market index where we are included, narrowing our room to maneuver. We need to be included in the MSCI developed market index to create better supply and demand conditions. What we should focus on is not the Geumtu Tax but the removal of backward financial policies that keep us stuck in the MSCI emerging market index. Keep in mind that Taiwan, which once introduced the Geumtu Tax, repealed it after its index plummeted.

Second, from the corporate perspective. Our listed companies are notorious for neglecting shareholder value amid the difficulties of high inheritance taxes. Companies must protect shareholder interests as much as company profits. The government announced it will disclose a value-up index this month and launch related exchange-traded funds (ETFs) within this year. Instead of demanding value-up disclosures from companies, it also revealed ambitions for incentives such as shareholder return promotion tax benefits and premium evaluations for major shareholders. Without such corporate-level changes, the development of our stock market is far off. Even institutional investors engage only in short-term trading, and the National Pension Service is trying to reduce its domestic market inclusion. If no one nurtures the "cattle," who will? If there is no cattle but only taxes imposed, tax revenue will inevitably decrease. Even the cattle would yawn at this.

Third, the issue of fairness from the investor's perspective. The Geumtu Tax is imposed only on individual investors. For foreigners, under the current system, capital gains tax on stocks is levied only when a foreigner holding more than 25% of a single stock sells it. Increasing the tax burden on domestic investors while leaving foreigner privileges untouched is not justifiable in terms of tax justice. Our market has long been a playground for foreign futures traders. It is no surprise that individual investors, who are at an absolute disadvantage compared to foreigners and institutions, invest in stocks without foreign or institutional presence, turning the stock market into a speculative market. Meanwhile, the plan to amend related laws to allow direct overseas stock investment through Individual Savings Accounts (ISA) is shocking.

How long must our stock market bear the disgrace of being called "Boxpi"? Belgium and Luxembourg, which introduced the Geumtu Tax, do not tax capital gains on stocks held by general shareholders (excluding controlling shareholders) for more than six months. Many countries provide tax benefits for long-term stock holdings. It would be much more productive for the ruling and opposition parties to discuss financial advancement measures face-to-face and address the Geumtu Tax issue later.

Jo Won-kyung, Professor at UNIST and Director of the Global Industry-Academia Cooperation Center