[Op-Ed] The Financial Investment Tax, Which Could Trigger Massive Capital Outflows, Must Be Revised Realistically

The financial investment income tax is a burden that will be imposed on everyone in the capital market, not a “tax cut for the rich” or a “tax cut for investors”

The most prominent problems with the financial investment income tax are the loss carryforward system and withholding tax

If the financial investment income tax proceeds in its current form, everyone will suffer. The tax has been deferred amid considerable controversy. If these problems are ignored, all stakeholders will end up bearing the consequences.

The financial investment income tax is a tax scheme designed without sufficient consideration of actual conditions. In the capital market, everything is interconnected. Investors build portfolios by selecting assets with low correlations, but our circumstances are more interconnected than ever. Trying to raise revenue in the investment market by taxing only a small group is bound to create problems. The financial investment income tax is not a “tax cut for the rich” or a “tax cut for investors” that benefits someone; it is a burden placed on everyone in the capital market.

If the financial investment income tax is introduced without revisions, stock investors may face falling share prices. The tax applies to those earning more than 50 million won per year. Although it is presented as a tax targeting so-called “big players,” ordinary investors will also be affected. That is because it could trigger large-scale capital outflows and lead to a drop in stock prices. The domestic stock market would no longer remain an attractive investment destination. In that case, it would also be difficult to expect large-scale capital inflows.

No one can know exactly how severe the impact of falling stock prices would be. However, a similar case can be found in Taiwan. In 1989, Taiwan introduced a tax system with a structure similar to the financial investment income tax. Within a month, its stock market plunged by 36%, and the system was eventually repealed.

Lowering the securities transaction tax cannot serve as a shock absorber. Some argue that “lowering the securities transaction tax while introducing the financial investment income tax is more reasonable and can reduce the burden on ordinary investors.” But even if the securities transaction tax is lowered, the Special Tax for Rural Development remains in place. It is not likely to be attractive to investors when a new tax, the financial investment income tax, is added while only an existing transaction tax is reduced.

We must also consider the repercussions of driving the securities transaction tax down too far. The securities transaction tax plays a healthy role in the market. Market distortions can arise when stocks are traded within very short periods of time. The securities transaction tax makes investors conscious of the frequency of their trading.

The loss carryforward system and withholding tax are the most prominent problems with the financial investment income tax. The loss carryforward system, which allows taxes to be offset by the amount of losses incurred, is permitted for up to five years. It is questionable whether five years is enough time to recover losses incurred in the domestic stock market through future gains. Under the financial investment income tax, tax is withheld every half-year, after which investors must report to the tax office to receive a refund. Withholding tax is one of the provisions most strongly opposed by investors. The reason is that capital becomes tied up, preventing investors from fully enjoying the benefits of compounding.

The financial investment income tax must be revised in a realistic direction. In its current form, it would trigger large-scale capital outflows from the stock market. It is right to levy taxes where income exists, but if the financial investment income tax is not to disrupt the market, it must be designed in a way that preserves the attractiveness of Korea’s financial market.

It is necessary to refer to systems in foreign countries that operate regimes similar to the financial investment income tax, but we must keep in mind that markets differ. The U.S. market and the Korean market must not be treated as the same. To improve persuasiveness, the method of tax collection should be changed, and the period for the loss carryforward system should be extended reasonably. The financial investment income tax, which in its current form would be nothing more than a self-defeating move, must be revised so that it can coexist with sound investment.

Hyunju Jeong, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 대규모 자금 유출 유발하는 금투세, 현실성 있는 방향으로 보완돼야

Author: Hyun-ju Jeong

Date: 2024-08-28

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26842