[Inside Chodong] The Stock Market Is Not a Test Paper... Signals Matter More Than Numbers

Is it 5 billion won or 1 billion won? The ongoing controversy over the major shareholder threshold for stock capital gains tax, which has weighed on the Korean stock market for over a month, has once again proven an old Wall Street adage: 'Markets trade on expectations.'

In any case, even if the major shareholder capital gains tax threshold was drastically lowered from the current 5 billion won to 1 billion won, the structure would still allow most investors, except for a very small minority, to avoid taxes through sales in October or November. The key issue was not the numbers (tax rates), but rather the 'signal' that the government sends to the market through its tax reform plans.

Ultimately, even President Lee Jaemyung, who hinted at withdrawing the 1 billion won proposal during his 100th day press conference, commented on the situation by saying, "It feels like a test paper to gauge the government's commitment to revitalizing the stock market." This is despite expert opinions, which differ from the Ministry of Economy and Finance's estimates, that the actual fiscal benefit would not be significant.

Now, the market's attention is shifting to the 'separate taxation of dividend income.' The maximum tax rate included in the government’s recently announced tax reform plan was 35%, not the 25% proposed by Lee Soyoung of the Democratic Party of Korea. As a result, there is growing criticism in the market that the incentive to increase dividends is significantly diminished, and that this could dampen investor sentiment as much as the major shareholder capital gains tax threshold. The National Assembly Research Service also publicly pointed out that the tax rate should be lowered to around 25% to effectively encourage increased dividends.

One positive note for the stock market is that President Lee Jaemyung directly addressed the issue of separate taxation for dividend income during last week’s press conference. Seemingly aware of the criticism, President Lee stated, "If there is no significant loss or deficit in tax revenue, the goal is to maximize dividend payouts as much as possible," and added, "If necessary, we can make adjustments at any time."

The market, having already developed doubts about President Lee's policy stance following the major shareholder threshold issue, will now seek to confirm the new administration’s policy consistency once again. Even in the current situation, although the President has personally reaffirmed the priority of 'revitalizing the capital market,' the government’s overall approach has been inconsistent and indecisive. Furthermore, instead of presenting a long-term roadmap to compensate for the revenue side after stepping back from the major shareholder capital gains tax requirement, no complementary measures have been offered. Even though this is an issue that could be immediately resolved through a government decree, President Lee's decision to 'leave it to the National Assembly' appears to be an attempt to avoid controversy over tax equity. In many ways, this is an embarrassing situation for the newly inaugurated administration.

Recently, in global capital markets, there is a trend of accepting a certain level of active government intervention and policy support. To gain the market’s trust, the government must demonstrate and implement its goals and methods with consistency. In the United States, for example, the government has recently engaged in strategic interventions such as making export and profit-sharing agreements with semiconductor companies, taking stakes in companies, and seeking priority rights in certain corporate decisions.

Korea, too, should move beyond mere slogans like 'KOSPI 5000' and instead design and implement tax reforms, pension fund management, and regulatory reforms according to a consistent roadmap. How much longer will we hear that "this is why Korea cannot progress"? Inconsistent and indecisive policy stances only expose the government’s lack of preparedness and undermine the market’s trust.