A tax exemption for what?

The government cannot afford another tax cut.

President Yoon Suk Yeol, upon opening the Korea Exchange for the first time this year, promised to undo a new tax scheme dubbed the Financial Investment Income Tax — a comprehensive tax on capital gains from securities investment — which was supposed to take effect in 2025. It was the first time the president mentioned scrapping the new tax plan, which has been on hold for two years.

The president said that the move aims to remove capital market regulations that “do not meet global standards” and “can cause the Korea Discount,” as many Korean companies are undervalued despite being strongly competitive against global rivals.

The new tax plan calls for an income tax on investors who earn more than 50 million won ($38,000) from their holdings in stocks, bonds, funds and derivatives. Net gains above the 50 million won ceiling would be taxed at 20 percent and gains above 300 million won at 25 percent. The new tax was due to take effect from 2024; it was deferred for two years under a bipartisan agreement in 2022.

It was in 2020 that the liberal administration proposed a new tax on financial investments. The government deemed the country’s tax exemptions for financial investments too broad compared to its income taxes on labor and business earnings. The wider exemption scope made it easier for the stock-rich to avoid taxation through financial investment. The government based the decision on the need to ensure fairness in taxation and to simplify the tax code across financial instruments. But why is President Yoon trying to revoke the new tax aimed at “advancing” financial taxation?

Yoon’s idea can only be an effort to court votes from retail investors for the ruling party in the upcoming parliamentary election following his administration’s earlier decisions to ban short selling and ease the shareholding threshold for capital gains tax. Unsurprisingly, individual investors have been lobbying for the new tax to be scrapped. As a consequence, the stock market is drifting farther away from global standards.

The rival parties had agreed to give the new tax a two-year grace period, citing resistance from taxpayers. President Yoon worried about an “excessive tax burden.” Resistance arises not because of the low public consciousness around taxation, but because of the lack of public faith in the government after its repeated flip-flops in tax policy. The government came up 60 trillion won short after tax collection last year, and it expects a combined fiscal deficit of 44 trillion won this year. It cannot afford another tax cut. A conservative government must resist populist policies no matter what.