Stock Prices Rise with Value-Up, Fall with Tax Reform... Is Reconsideration Possible?

Market Cap Plunges by 100 Trillion Won After Government Plan Announcement
Major Shareholder Capital Gains Tax Threshold Tightened to 10 Billion Won
Ruling Party Signals Review from Scratch Amid Market Shock
However, Divisions Remain Within the Ruling Party
Presidential Office Opposes Reconsideration of Amendment

After the government's announcement of its tax reform plan, the stock market plunged nearly 4%, with over 100 trillion won in market capitalization wiped out, spreading shock throughout the market. In response, the ruling party stated that it would reconsider from scratch the criteria for major shareholders who are subject to the capital gains tax on stocks. However, as public trust in government policy has already been significantly shaken, there are concerns that merely easing the controversial major shareholder criteria will not be enough to revive investor sentiment. Furthermore, unlike the ruling party, the government continues to maintain a negative stance toward reconsidering the tax reform plan, leading many to believe that the likelihood of an actual revision is low.

According to government ministries on August 6, the Ministry of Economy and Finance has begun reviewing follow-up measures regarding the government-proposed 2025 tax reform plan it recently announced. A government official stated, "After announcing the reform plan, we are currently listening to a wide range of opinions not only from the political community but also from investors and others," adding, "Generally, after a legislative notice and public opinion gathering, we continue to communicate with the National Assembly during inter-ministerial consultations." However, the official added that the Democratic Party, the ruling party, has not officially requested a reconsideration of the tax amendment bill.

The Ministry of Economy and Finance announced on July 31 a tax reform plan that would strengthen the major shareholder criteria for capital gains tax on stocks from 50 billion won to 10 billion won under the Lee Jaemyung administration, reversing the upward adjustment made by the Yoon Suk-yeol administration. The government explained that this was a measure to address inequality in the capital market and enhance tax fairness. However, immediately after the announcement, when the market plummeted on August 1, the Democratic Party stated that it would reconsider the major shareholder criteria. Kim Byungki, the Democratic Party's floor leader, said, "We are reviewing options such as raising the 10 billion won major shareholder threshold through the party's KOSPI 5000 Special Committee and Tax Normalization Special Committee," emphasizing, "Close consultation between the party and the government is necessary to restore investor confidence."

The problem is that there is no consensus within the ruling party itself regarding the direction of reconsidering the tax reform. Lee Eonju, a Supreme Council member of the Democratic Party, pointed out, "The revenue effect is minimal, so we need to consider whether this approach is truly effective. Rather than focusing on tax revenue, perhaps we should concentrate more on revitalizing the capital market."

The possibility of partial adjustments rather than a full restoration was also left open. A Democratic Party official said in a phone call, "There is still time before the tax law review," and added, "Further discussion is needed on whether to restore the major shareholder capital gains tax threshold to 50 billion won or adjust it to around 30 billion won."

The presidential office expressed a negative view, stating, "It is not easy to reconsider policy based solely on stock price fluctuations over a day or two when it comes to changing the structure of the stock market." The office maintains that the purpose of this tax reform is to "enhance tax fairness." In fact, it explained that even in years when the major shareholder criteria changed in the past, stock prices both rose and fell, making simple comparisons difficult.

However, the financial investment industry holds a different perspective. An asset management company official pointed out, "If the major shareholder criteria are tightened, the phenomenon of supply-demand distortion, with a flood of sell-offs at the end of each year, will be repeated," adding, "This could increase market uncertainty and negatively affect the inflow of foreign investment."

Some argue that the scope of reconsideration for this tax reform plan should include not only the major shareholder criteria for capital gains tax on stocks, but also the introduction of separate taxation for dividend income, as well as adjustments to corporate tax and securities transaction tax. In particular, regarding the plan to allow separate taxation at a maximum rate of 38.5% for dividend income from companies with a dividend payout ratio of 40% or more, the market largely views the scope of companies eligible for separate dividend taxation as too narrow and the maximum tax rate as too high, falling short of expectations.

Kang Sungjin, a professor of economics at Korea University, said in a phone interview, "There is strong opposition in the market to the idea of defining 1 billion won as the threshold for major shareholders. As stock holdings and incomes grow, many believe the previous standard should be maintained, but instead, it has been strengthened."

Some in the political community argue that, given similar situations have occurred under previous administrations, the ruling party should quickly clarify its position and promptly push for legal amendments. In fact, during the Park Geun-hye administration in August 2013, the government withdrew its tax reform bill just five days after its announcement due to controversy over 'middle-class taxation' and completely redesigned it from scratch.