[Reporter’s Notebook] Aftermath of Stock Capital Gains Tax Reform: ‘An Overreaction’

The first tax reform proposal of the Lee Jaemyung administration, which aimed to lower the threshold for major shareholders subject to capital gains tax on stock transfers from 5 billion won to 1 billion won, caused volatility in the stock market as soon as it was unveiled, and politicians immediately called for a "reconsideration." The atmosphere shifted rapidly. In response to market reactions, voices within the political sphere insisted that the policy needed to be revised. As a result, there are now expectations that the threshold will either be restored to 5 billion won or, at the very least, compromised at a level between 2 billion and 3 billion won, with consensus that some form of change is inevitable.

However, it is worth considering whether this trend truly reflects a balanced judgment. Although there have been numerous claims that "major shareholders exit the stock market at the end of the year out of fear of taxes, causing market instability," there is little evidence to support the notion that an increase in capital gains tax actually leads to a decline in stock prices. The Ministry of Economy and Finance explained that it is difficult to find a direct correlation between capital gains tax reform and stock price movements.

In fact, when the threshold for major shareholders subject to capital gains tax was tightened from 2.5 billion won to 1.5 billion won at the end of 2017, the KOSPI actually showed an upward trend at year-end. An examination of the KOSPI index during that period reveals that it rose by 0.85% from the first week of December to the first week of January, by 0.85% from the second week of December to the second week of January, by 2.28% from the third week of December to the third week of January, by 3.73% from the fourth week of December to the fourth week of January, and by 5.16% from the fifth week of December to the fifth week of January. This suggests that the ministry's explanation is not merely a defensive argument.

This is not to say that market instability should be ignored. However, it is worth reflecting on whether it is truly rational to immediately translate emotional reactions into policy, and whether the speed of such decisions is appropriate. One government official remarked, "If the voices of stock investors are amplified and the government responds out of alarm, it could create a vicious cycle in which certain opinions are disproportionately represented." It is also important to heed the criticism that the current taxation system for financial assets in Korea has become patchwork and disorganized. For example, depending on whether an ETF is listed domestically or overseas, it may be subject to either dividend income tax or capital gains tax, with inconsistent application. This is the result of repeatedly missing the right timing for reform due to fears over tax increases.

There are also those who compare the threshold for capital gains tax on stocks with the holding tax on apartments. However, is it reasonable to simply compare the tax systems for individual investors holding more than 1 billion won "per stock" with those for real estate investors holding a single high-value apartment, which is often linked to actual residential demand? On August 6, Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol stated at a meeting of the National Assembly's Strategy and Finance Committee, "Our research shows that the average Korean holds 5.79 stocks." To be subject to major shareholder taxation across all holdings, one would need to possess more than 5 billion won in assets, which makes the taxation reasonable. This is why it is difficult to agree with the argument that the tax system for these individuals should be identical to that for investors who own a single apartment worth over 1 billion won. Despite these circumstances, it is regrettable that tax policy is being swayed by the loudest voices in public opinion and is subject to frequent and abrupt changes.