[Insight & Opinion] Separate Dividend Taxation Bill: Achieving Both Increased Tax Revenue and Economic Revitalization

Recently, lawmakers from both the ruling and opposition parties have been actively proposing bills for the separate taxation of dividend income. Although the bills proposed by Assemblyman Park Sunghoon (People Power Party), Assemblywoman Lee Soyoung, and Assemblywoman Kim Hyunjung (Democratic Party of Korea) differ in their detailed design, they all commonly suggest applying a separate taxation rate of up to 27.5% (including local taxes) to dividends from listed companies that meet certain requirements.

This rate is equivalent to the current maximum capital gains tax rate on stock transfers, which means that even major shareholders would have significantly less reason to avoid receiving dividends. During a recent interpellation session, Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol responded positively to a question from Democratic Party Assemblywoman Lee Eonju, stating, "We will cooperate closely with the National Assembly." As a result, the likelihood of the bill being merged, reviewed, and passed is higher than ever.

Nevertheless, a simplistic counterargument persists that "lowering the dividend tax equals a decrease in tax revenue." Some claim that "a lower tax rate does not guarantee an increase in dividend payout ratios." However, this sounds as unreasonable as saying, "There is no guarantee that raising tariffs on beef will reduce consumption." Currently, South Korea records one of the world's highest dividend tax rates and one of the lowest dividend payout ratios.

It is a rational inference to expect that lowering the dividend tax rate to the global average would bring the dividend payout ratio closer to the global average as well. In fact, according to an analysis by Align Partners Asset Management, if Assemblywoman Lee Soyoung's bill is adopted and the dividend payout ratio rises by just 0.6 percentage points from 22.1%, dividend tax revenue will start to increase. If the payout ratio reaches the global average, tax revenue could rise by more than 6 trillion won. If this analysis holds true, there is little chance that a dividend tax cut would lead to a decrease in tax revenue.

The ripple effects of a dividend tax cut do not end there. An increase in dividends can drive up stock prices and trading volumes, which could significantly boost securities transaction tax revenue. Moreover, a re-increase in the securities transaction tax rate is already scheduled. Considering that securities transaction tax revenue in South Korea dropped sharply from about 10 trillion won in 2021 to about 5 trillion won in 2024, and that fluctuations in securities transaction tax revenue are much greater than those in dividend income tax, the expected effects become even more pronounced.

If the ongoing stock market boom leads to a continued increase in the number of listed companies, the total tax revenue collected from the stock market could enjoy a "multiple effect." Rising stock prices would also bring a bonus of increased tax revenue from major shareholders’ capital gains taxes and stock-related inheritance and gift taxes.

A dividend tax cut serves as a bridge from capital market revitalization to overall economic activation. Increased dividend income for the middle class boosts consumption, while increased dividend income for asset owners stimulates investment. This leads to higher gross domestic product (GDP) and, in turn, greater tax revenue. South Korea’s asset structure, which has been excessively concentrated in real estate and has caused various side effects, would change, and more people would be able to enjoy a worry-free retirement thanks to dividend income. National pension and retirement pension yields would also rise, easing the structural burden on public finances. As more companies grow through the capital market, the Korean economy would be able to compete globally on a stronger foundation.

I hope the bills for the separate taxation of dividend income, recently proposed in the National Assembly, will be passed as soon as possible. Excessively complex conditions should be boldly removed during the merging process, and the implementation date should be advanced as much as possible. We must be confident that this bill is the institutional key to achieving both increased tax revenue and economic revitalization.

Suh Joonsik, Professor of Economics, Soongsil University