Subscribe
E-Paper
 |
| The government plans to finalize its capital gains tax scheme by the end of July. / Korea Times file |
By Anna J. Park
Retail investors' disgruntled voices are being raised over the government's planned capital gains tax scheme, which will go into effect in 2023.
The government earlier said it plans to introduce a capital gains tax of 20 percent to 25 percent on retail investors' profits earned through the selling of stocks both in the major KOSPI and tech-savvy KOSDAQ markets.
The tax will be levied on those who earn more than 20 million won ($16,700) a year in profits by trading stocks, and a 25 percent capital gains tax will be levied on those who earn more than 300 million won ($250,000) a year. Meanwhile, the securities transaction tax will be lowered from 0.25 percent to 0.15 percent, the outline said.
Because retail investors here have so far been exempt from the capital gains tax, unlike institutional investors who have been paying a 20 percent corporate tax on profits they earn through stock investment, the government's planned move seems largely in line with the principle of taxation that where there is income, there's tax.
Yet, the devil is in the details.
Even considering that these "schemes" have yet to be finalized as lots of outstanding issues should be addressed, some of the tax schemes seem quite bizarre and arbitrary at the expense of healthy growth of the capital market. One of the main problems from the outline is that it does not differentiate short-term and long-term investors; whether an investor holds a stock for a few minutes or for years, the investor is subject to the same rate of capital gains tax.
In the United States, the capital gain tax differs depending on how long an investor holds stocks before selling them. If an investor holds the stocks for more than a year before selling, then it is considered a long-term gain and will be taxed at a lower rate.
From that standpoint, the current tax plan could encourage the act of day trading, while long-term investors will be stripped of incentives to hold valuable stocks for a long time.
Furthermore, as long-term investors normally and usually focus on a company's substantial growth potential over a long period of time, they tend to generate bigger amounts of profit, once they decide to sell the shares. Thus, they're more prone to be levied with a 25 percent capital gains tax that is imposed when the profit is more than 300 million won. This means that under the current system, it is more advisable to sell the stocks before the profit hits the 300 million won mark, which could hurt the appetites of investors weighing in on long-term investments.
Another central point of debate about the tentative plan is that the capital gains tax is collected every month, and every May excessively imposed taxes will be returned to investors upon their request.
Insiders express their bewilderment about the plan, saying monthly collection of the tax reduces investors' compounding interest effect of their investment money. The government takes the money for zero interest for several months before returning the money to investors, when the money could be used for other investments.
The finance ministry told lawmakers that such a monthly collection is to serve the convenience of investors. Yet, such a rationale is not convincing at all, given that the government is fully capable of developing a more logical system of annual imposition of the tax, while protecting individual investors' investment motivations.
The three-year period of aggregating financial profits is also criticized that the length is too short and arbitrary. According to the plan, an investor's profits or losses from the stock market will be carried forward to following years during a three-year period so that the capital gains tax could be levied appropriately. However, in the cases of the U.S., U.K., and Germany, the aggregating period is unlimited, while France gives a 10-year period.
The finance ministry plans to finalize the tax system at the end of this month. However, many discontented retail investors are planning to leave the stock market before the arrival of 2023, and are instead aiming to invest in more systemized stock markets like the U.S.
Korea's government should not forget the lesson offered by Taiwan's two failed attempts to introduce a capital gains tax in 1989 and 2013. The country could not help but finally abolish the adoption of the tax at the end of 2015, after severe market crashes and a decline in stock trading volume.
