Will tax reform plan be revised to ease concerns of retail investors?

The KOSPI index is displayed at the dealing room of Hana Bank headquarters in Seoul, Monday. Yonhap

Attention is now focused on whether the Lee Jae Myung government will reconsider a plan to lower the capital gains tax liability threshold for large shareholders from 5 billion won ($3.6 million) worth of stock to 1 billion won amid growing investor backlash, according to market watchers, Monday.

Since Thursday when the Ministry of Economy and Finance announced the plan as part of the government’s tax reform measures, doubts have been mounting about the president’s policy goal of encouraging stock investment as an alternative to real estate in an effort to ease excessive capital inflows into the property market.

Even within the ruling Democratic Party of Korea (DPK), calls to scrap the proposal are gaining momentum amid concerns over market confusion, with some lawmakers warning against inconsistent policy signals.

In its announcement of tax reform measures, the finance ministry said the government plans to exclude cash dividends from high-dividend companies from comprehensive income taxation and instead tax them separately.

It also proposed raising the securities transaction tax from 0.15 percent to 0.2 percent and lowering the capital gains tax threshold for major shareholders from 5 billion won to 1 billion won per stock, aiming to reverse the previous Yoon Suk Yeol administration’s tax reduction measures.

Retail investors, however, criticized the measures, saying the concentration of tax hikes on the stock market contradicts the Lee administration’s pledge to promote equities.

The backlash has intensified because the latest tax reform proposal left real estate taxes largely unchanged. It includes no measures to cool the overheated property market, such as higher comprehensive property taxes or tougher capital gains taxes on real estate holdings.

Reforming property taxes was widely seen as a way to encourage a shift of funds from real estate to stocks. The lack of action on real estate is causing confusion among both real estate and equity investors.

First Vice Minister of Economy and Finance Lee Hyoung-il, center, speaks during a press briefing about the government's tax reform measures at Government Complex Sejong, July 29. Yonhap

Regarding this, a finance ministry official said, “Real estate is a sensitive issue requiring careful consideration of loan regulations, housing supply and market impacts before any tax changes are made.”

Lee has promoted stock market growth as an alternative to the overheated real estate market.

At a July 1 Cabinet meeting, he said, “With investment choices mostly confined to housing and real estate, properties have turned into instruments of investment and speculation, contributing to housing market instability. However, as the financial markets stabilize, stocks are increasingly becoming a viable alternative. It is important to sustain this positive trend.”

Critics said, however, that the recent tax reform plan runs counter to Lee’s goal of reaching a “KOSPI 5000,” with the domestic stock market plunging sharply on Friday after the announcement.

Criticism has also come from within the ruling party. Rep. Lee So-young stressed that the government’s tax policy should strengthen real estate taxes while offering incentives for stock investments.

“Mixed signals from politicians could unsettle the market. Any promise to encourage a shift of funds from real estate to equities must be backed by consistent policy actions,” she said.

Amid escalating controversy, Rep. Jung Chung-rae, newly elected leader of the DPK, replaced chief policy maker Rep. Jin Sung-joon with Rep. Han Jeoung-ae on Sunday, directing her to develop solutions concerning the criteria for defining major shareholders.

“We will promptly finalize our stance and communicate it to the public,” Jung said.

Once its position is settled, the party is expected to collaborate with the government on revisiting the major shareholder threshold. Some insiders predict a compromise around the 3 billion won mark.

A senior party official said on condition of anonymity, “Market sentiment remains largely negative toward the major shareholder criteria, so it is important to reach a resolution swiftly.”

The KOSPI, which closed at 3,119.41 points — a drop of 3.88 percent — on Friday, rebounded slightly on Monday, closing at 3,147.74 points, up 0.91 percent.