[Inside Chodong] Even Pragmatism Needs Principles

Tax Revenue vs. Stock Market Revitalization: The Dilemma
Democratic Party Divided Over Capital Gains Tax Reform

The ruling Democratic Party has been thrown into turmoil, as if a hornet's nest had been stirred, over the issue of expanding the scope of major shareholders subject to capital gains tax from those holding "at least 5 billion won per stock" to those holding "at least 1 billion won per stock." Some argue that securing tax revenue is necessary, while others point out that this move runs counter to efforts to revitalize the capital market.

The origins of this issue date back to the end of 2023. At that time, the Yoon Suk-yeol administration revised the enforcement decree to raise the threshold for major shareholders subject to capital gains tax from 1 billion won to 5 billion won. This excluded investors holding between 1 billion and 5 billion won in a single stock from being subject to the tax. The Democratic Party criticized the government's decision at the time, stating, "This will ultimately lead to a situation where there is income but no tax." Logically, the government's recently announced tax reform plan simply reverts the tax system to what it was two years ago. However, unlike in the past, opinions within the Democratic Party are now divided for and against the measure.

There are valid reasons for opposing the stricter criteria for capital gains tax. Under the Lee Jaemyung administration, the government has actively encouraged a so-called "money move," aiming to draw funds concentrated in real estate into the more productive stock market. The tax reform plan could become an adverse factor. The intention was to stimulate the stock market to stabilize housing prices and ease corporate fundraising, but some believe this reform has undermined market confidence. There are also concerns that if the requirements for major shareholders are tightened, investors may rush to sell at the end of each year to avoid the tax, causing turmoil in the stock market. On the day after the tax reform plan was announced, on the 1st of this month, the stock market plummeted, and investors criticized the politicians who pushed the policy.

There are also grounds for supporting the measure. The Lee Jaemyung administration, having inherited a deteriorated fiscal situation, is not in a position to be selective. The argument that the government needs to secure revenue in the face of weakened fiscal conditions is also reasonable. Under the banner of "normalizing the tax system," the government has brought up the politically sensitive issue of tax increases.

Through increases in corporate tax and securities transaction tax rates, the government expects to secure approximately 35 trillion won in additional tax revenue over the next five years. However, it remains questionable whether this will resolve the tax revenue shortfall. The need for additional fiscal resources to fulfill Lee Jaemyung’s presidential campaign pledges must also be considered. There are countless areas where money is needed, but the sources of revenue are limited. The plan to strengthen the criteria for capital gains tax was presented as a means to "expand the tax base and rationalize the tax system," but it has already hit a snag before proper implementation. The Democratic Party is refraining from public debate and is instead going through procedures to gather opinions.

Tax experts are concerned that every time asset-related tax issues arise, tax reform is swayed by public backlash. "In our country, asset-related taxation is weak, while tax revenue is concentrated in income and consumption taxes. Whenever discussions about real estate or stock-related taxes emerge, the political arena is thrown into chaos." The critical remarks from tax experts are worth reflecting on.

Above all, the biggest problem is the lack of adherence to principles. As the principle of taxing where there is income is not upheld for various reasons, every issue seems to turn into a political struggle. Pragmatism is a good thing. However, if it is criticized as "pragmatism without principles," it is no different from an empty shell.