Tax hike policies feared to derail Lee's pledge to push KOSPI above 5,000

Multiple screens show real-time charts of the Korean stock market at a dealing room at Hana Bank's headquaters in central Seoul, July 3, alongside a live broadcast of President Lee Jae Myung's press conference to mark his first 30 days in office. Yonhap

The government is facing a dilemma over its plan to hike the capital gains tax on stock investments, which could undermine the benchmark KOSPI from reaching a 5,000-point milestone as pledged by President Lee Jae Myung, economists said Thursday.

The Ministry of Economy and Finance is considering tighter rules on capital gains taxes by lowering the minimum gains from the current 5 billion won ($3.65 million) to 1 billion won.

Aimed at securing tax revenues, this plan is a revival of the 2017-22 Moon Jae-in administration’s policy that went after major shareholders to collect more taxable income.

A higher capital gains tax, however, has been considered a culprit behind the longstanding discount in stock market valuations, as major shareholders dumped their shares at year’s end to avoid taxation.

The unloaded amount was large enough to rattle the market. In 2023, then-President Yoon Suk Yeol raised the capital gains tax threshold from 1 billion won to 5 billion won to enliven investor sentiment.

“Against this backdrop, it is easily predictable that major shareholders will unload their shares again if the Lee government returns to the Moon government’s capital gains tax policy,” said Jung Eui-jung, head of the Korean Stockholders' Alliance.

He said tightening capital market taxation is likely to “pour cold water on the current bull market and disrupt Lee’s vision to take the KOSPI to an unprecedented 5,000-point milestone.”

Jung was referring to the current stock rally on the back of Lee’s market reform drive.

The KOSPI closed above 3,000 points for the first time in over three and a half years on June 20, and the country’s total market capitalization — encompassing KOSPI, Kosdaq and KONEX — surpassed 3,000 trillion won ($2.17 trillion) for the first time on July 10.

Inha University economics professor Shin Il-soon said a return to the capital gains threshold at 1 billion won will “ultimately dent the government’s goal of collecting more tax revenue.”

Shin noted that the unstable market takes a heavier toll on retail investors than major shareholders, and that an estimated 14.1 million small investors “may be tempted to exit the market under higher capital market taxation.”

Their departure, according to the professor, would mean a decline in securities transaction taxes, which is levied whenever stocks are sold, regardless of how much profit a seller makes.

The securities transaction tax rate is 0.15 percent.

Korea Securities Depository data in 2024 showed the government annually collected 6.6 trillion won in securities transaction taxes and that 75 percent of the amount came from retail investors.

“A short-sighted move to collect more tax from major shareholders can instead end in collecting far fewer taxes from retail investors,” Shin said.