How will the Lee Jae-myung government judge the financial investment income tax? An analysis of the implementation of the financial transaction tax and policy direction.

Overview of Financial Investment Income Tax

The financial investment income tax (hereinafter referred to as 'financial investment tax') was included in the income tax law amendment as part of the 'capital market modernization plan' promoted by the government in 2020 and passed the National Assembly. Originally, it was scheduled to be implemented from January 2023. However, ahead of its implementation, concerns about worsening economic conditions and market stability arose, leading the government to postpone the implementation of the financial investment tax by two years, changing it to January 2025.

Trends in Financial Transaction Tax After the Change of Administration

Following this performance, the regime was replaced, and at the Democratic Party's Supreme Council meeting in November 2024, President Lee Jae-myung publicly expressed his agreement with the stance that 'the stock market is in a very difficult situation' and supported the repeal of the financial transaction tax. Consequently, the Democratic Party ultimately decided to abolish the financial transaction tax, which was scheduled to be introduced in January 2025, and it is expected that the financial transaction tax will not be implemented as planned after the launch of the Lee Jae-myung government.

The Significance of the Abolition of the Capital Gains Tax and the Tax Policy Direction

As a result, the implementation schedule for 2025 has become practically meaningless, and the government and the ruling party plan to promote amendments to the income tax law, including provisions for the financial investment tax, through future consultations and legislative procedures. However, the timing for the handling of the abolition bill may be fluid depending on the National Assembly schedule and political variables. The tax policy direction of the Lee Jae-myung government is consistent with the decision to abolish the financial investment tax.

Lee Jae-myung's tax policy pledge

During the presidential election process, President Lee Jae-myung emphasized large-scale investments in new growth industries such as AI and semiconductors. He promised to introduce tax systems that encourage domestic production in strategic industries, as well as establish a national fund worth 100 trillion won for the AI sector, aiming to promote reductions in investment income tax and corporate tax. Additionally, he stated his intention to transition to a 'family-friendly' income tax system (a tax structure that considers the number of spouses and children) and to expand credit card income deductions to effectively support workers and households.

The position of President Lee Jae-myung on the implementation of the financial transaction tax.

Regarding the financial investment tax, President Lee Jae-myung has previously proposed raising the basic tax deduction threshold from 50 million won to 100 million won during internal party discussions. However, in November 2024, while maintaining the fundamental stance that 'the implementation of the financial investment tax is correct in principle and value,' he shifted the policy direction from postponement to complete abolition based on the judgment that 'the current stock market is too difficult.'

The direction of stock market reform after the abolition of the financial transaction tax

The president has stated that after the abolition of the capital gains tax, he will focus on reforming the stock market structure. As evidenced by his remark that 'taxation is not punishment,' he expressed his determination to reduce excessive tax burdens while enhancing short selling regulations, protecting minority shareholders' rights, and improving corporate law and financial market systems, thereby restoring market confidence and establishing a foundation for growth.

The Impact of Capital Gains Tax on Individual Investors

The impact on individual investors is quite specific. If the capital gains tax is implemented, a new tax will be imposed on capital gains and dividend income from domestic stocks, bonds, and funds, which is expected to increase the tax burden on individual investors. In fact, experts have pointed out that once the capital gains tax is implemented, market volatility is likely to increase until the end of the year, and large-scale selling to avoid taxes can occur.

Relief for individual investors

However, due to the abolition decision of the Lee Jae-myung government, individual investors have been freed from the additional tax burden, and the exemption from capital gains tax on domestic stocks will be maintained as before, while the existing system of paying only dividend income tax (15.4%) is expected to continue. Positive changes in investment sentiment are also anticipated.

Positive impact on the overall securities market

A positive short-term effect is expected overall in the securities market. Since the possibility of large-scale selling and increased volatility caused by the introduction of the financial investment tax has been removed, it seems that stabilizing factors will act on the stock market in the short term. The fact that the system itself is entering a phase of being abolished has also alleviated policy uncertainties and reduced concerns about the outflow of funds seeking to remain in the domestic stock market.

Long-term challenges and concerns

In the long run, the key issue is how the proposed reforms by the Lee Jae-myung government, such as amendments to the Commercial Act and improvements to the short-selling system, will affect the fundamentals of the market in the direction of 'advancing the stock market.' If corporate governance improvements and enhanced protection for minority shareholders are realized, the Korean stock market could establish a more transparent and healthy investment foundation.

Criticism and Concerns About the Abolition of the Financial Investment Tax

However, there are also concerns. The abolition of the income tax on financial investments may be criticized as a 'tax cut for the wealthy' benefiting high-income investors, and there are voices calling for the need to secure other forms of revenue due to the government's decrease in tax income. In fact, it cannot be ruled out that controversies may arise in the future regarding policy credibility and tax equity.

Conclusion: The Implications of Abolishing the Capital Gains Tax

In conclusion, the abolition of the capital gains tax can be interpreted as part of a comprehensive policy framework emphasizing a growth-oriented tax reduction policy, investment activation, and institutional reform, which the Lee Jae-myung administration advocates. In the short term, it is anticipated to stabilize the stock market and alleviate the burden on individual investors, while in the long term, the consistency of market structural reforms and policy implementation will determine the qualitative development of the Korean capital market.