[Op-Ed] Time to Reconsider the Financial Investment Income Tax, Which Would Hurt the Stock Market

Tax equity among investors would be undermined, applying only to individuals.

It poses a high risk of causing instability in the stock market and driving investors overseas.

If the financial investment income tax is implemented, the tax burden on stocks will be higher than in the United States, Japan, Singapore, and Taiwan.

Controversy is intense over the “financial investment income tax” (hereafter, the financial investment tax), which is levied on profits earned from stock investment. Even after passing the National Assembly, it faced opposition from investors and was ultimately postponed in line with the ruling party’s position. However, with the opposition party securing a majority of seats in the 12th general election, the likelihood that the financial investment tax will take effect next year has increased, creating an unfavorable situation. This is because its implementation is highly likely to have a negative impact on the stock market.

There are three major problems if the financial investment tax is implemented.

First, tax equity among investors would be distorted. Unlike foreign and institutional investors, the financial investment tax applies only to individual investors. In particular, institutions may be subject to lower tax rates depending on their income level, while individual investors face high tax rates without any deductions. It is clear that this equity problem will hinder the healthy development of the domestic stock market.

Second, there is a risk of causing instability in the stock market. According to an estimate by the Ministry of Economy and Finance at the end of 2022 based on stock trading records from the previous 10 years, if the financial investment tax is implemented, the number of taxpayers subject to the tax is expected to increase tenfold, from 15,000 to 150,000. Individual investors who become subject to taxation will reduce their investments to avoid the tax burden, and stock prices will ultimately fall. If investors leave the domestic market because of the financial investment tax and move into overseas stock markets, there is also concern about capital outflows.

Third, implementing the financial investment tax would raise the tax burden on stocks above that of major countries. Among major countries, those that impose capital gains tax, such as the United States and Japan, do not have a securities transaction tax, while those that impose a securities transaction tax, such as Singapore and Taiwan, do not have a capital gains tax. If Korea, which already imposes a securities transaction tax, also levies the financial investment tax, which has the character of a capital gains tax, it would amount to double taxation.

Hyeji Lee, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 주식시장에 부정적 영향 가져올 '금융투자소득세' 시행 재검토 마땅

Author: Hye-ji Lee

Date: 2024-06-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26706