[Op-Ed] Capital Gains Tax on Financial Investments: A Self-Defeating Move if Left As Is

If the financial investment tax proceeds as it is, everyone will suffer. The financial investment tax has sparked considerable controversy and is currently under deferment. If the issue is ignored, all stakeholders will end up in a situation where they are harmed.

The financial investment tax is a tax system created without sufficient consideration of the circumstances. In the capital market, everything is connected. Investors build portfolios by selecting assets with low correlation, but we are more interconnected than ever. This is why trying to raise revenue by taxing only a small portion of participants in the investment market creates problems. The financial investment tax is not a tax cut for someone else, such as a “tax cut for the rich” or a “tax cut for investors,” but a burden imposed on everyone in the capital market.

If the financial investment tax is introduced without improvement, stock investors may have to endure falling share prices. Those subject to the tax are people earning more than 50 million won annually. It is a tax system aimed at so-called “big hands,” but ordinary investors will also be affected. This is because large-scale capital outflows lead to falling stock prices. The domestic stock market can no longer remain an attractive place to invest. In that case, it would also be difficult to expect large-scale capital inflows.

No one knows what the impact of a stock price decline will 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 tax. Within a month, its stock market plunged 36%, and the system was ultimately withdrawn.

Lowering the securities transaction tax cannot serve as a shock absorber. Some argue that lowering the securities transaction tax while introducing the financial investment tax would be more reasonable and could reduce the burden on ordinary investors. But even if the securities transaction tax is lowered, the Rural Special Tax still exists. It cannot be attractive to investors for a new tax, the financial investment tax, to be introduced while an existing tax, the transaction tax, is merely reduced. We also need to consider the repercussions that could arise from drastically lowering the securities transaction tax, because it plays a healthy role in the market. Market distortions can occur when stocks are traded within very short periods of time. The securities transaction tax makes investors aware of trading frequency.

The carryforward deduction system and withholding tax are the most prominent problems with the financial investment tax. The carryforward deduction system, which allows taxes to be deducted in proportion to 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 gains. Under the financial investment tax, tax is withheld every half year, after which investors must report to the tax office and receive a refund. Withholding tax is one of the aspects most strongly opposed by investors. The reason is that funds become tied up, preventing them from fully benefiting from compound returns.

The financial investment tax should be revised in a realistic direction. In its current form, it causes large-scale capital outflows from the stock market. It is right to levy taxes where there is income, but if the financial investment 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 foreign systems with institutions similar to the financial investment tax, but it must be kept in mind that markets differ. The U.S. market and the Korean market should not be treated as the same. To make the policy more persuasive, the method of tax collection should be changed, and the carryforward deduction period should be reasonably extended. If left as it is, the financial investment tax will amount to nothing more than a self-defeating move; it should be supplemented so that it can coexist with sound investment.

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

---

Original title: [칼럼] 금융투자소득세, 이대로 두면 자충수일 뿐

Author: Hyun-ju Jeong

Date: 2024-10-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=3&idx=27026