Abolition of Financial Investment Income Tax and Accelerated Capital Inflow: Market Outlook from the Retail Investor Perspective

Resolution of Market Uncertainty Through the Abolition of the Financial Investment Income Tax

The uncertainty surrounding the Financial Investment Income Tax, which has been an ongoing issue since initial discussions in 2020, has recently been resolved with the government's announcement of its abolition in the latest tax reform plan. The market had persistently raised concerns that the implementation of this tax would increase the tax burden on investors and trigger an outflow of domestic capital. This policy decision removes a significant risk factor, acting as a primary driver in restoring investor sentiment in the domestic stock market.

Acceleration of Retail Capital Inflow into the Stock Market

Following the decision to abolish the tax, the most distinct phenomenon observed is the influx of retail investor capital. Wait-and-see funds, which had been sidelined ahead of the tax's potential implementation, are showing signs of returning to the KOSPI and KOSDAQ markets.

• Benefits for the KOSDAQ Market: The KOSDAQ market, characterized by a higher proportion of retail investors and greater volatility, is the primary beneficiary of the tax reform. The alleviation of the tax burden is leading to increased trading activity in small-to-mid-cap stocks where investors seek high-risk, high-return opportunities.

Stabilization of 'Investment Migration': The trend of moving assets to overseas markets, such as the US equities, to avoid taxation—often referred to as 'investment migration'—has eased. This contributes to maintaining liquidity and defending the fundamental base of the domestic capital market.

Future Tasks: Resolving the Korea Discount and Structural Improvements

Despite short-term improvements in supply and demand and a psychological rebound, the abolition of the tax alone is insufficient to guarantee a long-term upward trajectory for the Korean stock market. Financial analysts point out that a structural approach is necessary to attract stable global capital.

The Need for Efforts to Enhance Corporate Value

For a sustainable bull market, it is essential to strengthen fundamental corporate competitiveness, including improving shareholder return ratios and corporate governance. True improvement in capital inflows will only materialize when there is a synergy effect with the recently active 'Corporate Value-up Programs'.

Direction of Further Tax Reform Discussions

Discussions on restructuring the taxation system to advance the capital market are expected to continue even after the abolition of the Financial Investment Income Tax. The market anticipates the evaluation of various incentives, such as rational adjustments to the securities transaction tax, tax benefits for long-term investors, and separate taxation on dividend income. The execution of these follow-up policies will be a key variable in determining the future attractiveness of the domestic stock market.