[Op-Ed] Windfall Tax Is Discriminatory Toward Financial Firms and Should Be Abolished

A Windfall Tax Would Trigger Turmoil Through Foreign Capital Outflows

A windfall tax resurfaces every election season as populist policies emerge

A windfall tax that would impose additional taxes on financial firms earning high interest income amid a high-interest-rate environment is now under discussion. Though it is being promoted in the name of helping ordinary people, it would not only squeeze them further but also risk causing dysfunction across the financial sector. Now is the time for a close examination of the dark side of the windfall tax.

A windfall tax is a discriminatory policy against financial firms. Financial companies have generated profits through lawful means and have paid taxes as stipulated under existing law. Imposing a windfall tax on such firms amounts to double taxation and is no different from cutting the wages of workers who have simply done their jobs diligently. Fluctuations in profits in response to changes in the external environment are merely a characteristic of the financial industry and should not become grounds for punishment.

A windfall tax also threatens to undermine the credibility that sustains financial firms. It is unreasonable to refrain from establishing institutional safeguards when interest rates fall, only to decide to collect more taxes when rising rates allow banks to earn higher profits. This could even encourage opaque management by banks seeking to reduce their tax burden. Creating conditions that induce companies to be dishonest is clearly undesirable.

If a windfall tax is implemented, the financial sector will face turmoil due to foreign capital outflows. Because a windfall tax would undermine banks’ financial soundness and profitability, foreign investors—who account for 50% of investment in domestic bank stocks—would inevitably see their investment sentiment shrink sharply. As a result, bank share prices would fall, and banks would suffer an additional financial blow from shareholder departures on top of double taxation.

Despite the fact that existing financial regulations have already hindered the growth of domestic banks, the government has once again reached for the card of tighter regulation. This will only bring further confusion to Korea’s financial firms.

It would also restrict consumers’ avenues for earning returns. Consumers have so far been able to choose from a wide range of financial products offered by financial firms according to their own circumstances, allowing them to protect their assets from changes in external conditions and pursue additional profits. But if financial firms’ pursuit of profit is constrained, banks will begin by discontinuing products with lower returns. As the diversity of financial products declines, consumers’ range of choices will shrink, interfering with both the protection of their assets and their efforts to earn profits.

It is also questionable whether a windfall “tax” even possesses legitimacy as a tax. If taxes change constantly for political reasons, they lose their legitimacy as taxes. A windfall tax is invoked every election season as populist policies emerge, and we must ask whether such a volatile policy can be implemented and used in a legitimate manner. A tax that departs from principle cannot possibly be effective over the medium to long term.

A windfall tax, which produces side effects for both financial firms and consumers, should be scrapped. Financial authorities must recognize that the ultimate goal of introducing any new system is to increase economic benefits. They must also uphold the universal principles of taxation.

Chaehui Kang, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 횡재세는 금융 기업에 대한 차별적 정책, 폐기가 마땅

Author: Chae-hee Kang

Date: 2024-04-25

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26577