[In-Depth Analysis] Intensifying Public Opinion on Complete Abolition of Financial Investment Income Tax Amid Market Downturn: Checking the Supply and Demand Stability of the Korean Capital Market

Intensifying Demands for the Complete Abolition of the Financial Investment Income Tax

As major global stock markets undergo consecutive corrections, voices among retail investors urging the complete abolition of the Financial Investment Income Tax are rapidly spreading in the domestic capital market. Concerns over a US-led economic downturn and massive profit-taking in large-cap tech and semiconductor sectors have put continuous downward pressure on the KOSPI index, adding significant fuel to this public sentiment. Particularly at a time when market fear has peaked due to theories of a 'semiconductor winter' and geopolitical risks in the Middle East, investors strongly point out that an increased tax burden during a bear market could severely and irreversibly dampen investment sentiment in domestic stocks.

The Financial Investment Income Tax is levied at a rate of 20-25% on annual capital gains exceeding 50 million won from financial investment products such as stocks, bonds, and funds. Although initially designed to improve tax equity and advance the taxation system, concerns about capital flight and a potential stock market slump have been continuously raised since the early discussion stages. At a time like the present, when external macro volatility is maximized and the relative weakness of the domestic stock market compared to major global markets is distinct, the introduction of a new tax system itself acts as the biggest risk factor increasing market uncertainty.

Resolving Market Uncertainty and Defending Supply and Demand

Blocking the Risk of Massive Capital Flight

The biggest concern regarding the implementation of the Financial Investment Income Tax was the massive capital flight of high-net-worth individuals, often referred to as 'big hands'. If they preemptively sell domestic stocks to avoid the tax burden and move their funds to overseas markets or alternative assets with relatively higher returns or tax advantages, the supply and demand base of the domestic stock market could be severely compromised. In fact, amidst the recent large-scale net selling by foreign investors causing a supply vacuum, if funds from domestic retail investors—who have been supporting the market—also exit consecutively, the downward pressure on the index will inevitably intensify to an uncontrollable level.

• Stabilizing Investment Sentiment: The complete abolition of the tax contributes to preventing panic selling and rapidly restoring short-term investment sentiment by entirely eliminating the tax risks and uncertainties caused by the system.
• Defending Against Supply Collapse: It plays a core role in maintaining the fundamental strength and liquidity of the domestic capital market by preemptively blocking the risk of large-scale property releases (overhang) by high-net-worth individuals and defending against a sharp decline in the index.

The Dilemma of the Korea Discount and Tax Policy

The discussion on abolishing the Financial Investment Income Tax goes beyond simply reducing taxes for retail investors; it is directly linked to the national economic challenge of resolving the chronic Korea Discount (undervaluation of the Korean stock market). The government and financial authorities are making all-out efforts to increase the shareholder return rate of listed companies and raise the attractiveness of the stock market through the 'Corporate Value-up Program'. However, if substantive taxation on investment returns is strengthened, active shareholder return policies by companies—such as expanding dividends or canceling treasury shares—may not lead to an increase in actual yields for investors, substantially halving the effectiveness of stimulus measures.

Nevertheless, criticisms and concerns from the perspective of taxation principles clearly exist. There are steady arguments that the fundamental principle of 'taxing where there is income' could be undermined, and that it is a tax cut policy for the wealthy, given that the actual taxpayers are only a tiny fraction of all retail investors. Therefore, policy authorities face the difficult challenge of drawing social consensus and finding a balance between the two important values of revitalizing the capital market and ensuring tax equity.

Long-term Challenges for Improving the Fundamentals of the Capital Market

In conclusion, the decision to abolish the Financial Investment Income Tax cannot be a panacea that instantly boosts a depressed stock market. It is closer to a defensive measure that preemptively reduces downside risks that could damage the market's fundamentals. In order for the domestic stock market to break away from short-term thematic trading and reorganize around stable long-term investments, more fundamental and structural improvements must be implemented concurrently.

Experts cite the introduction of separate taxation for dividend income, improvement of the backward corporate governance of listed companies, and strengthening the protection of minority shareholders' rights during mergers and spin-offs as essential follow-up measures alongside the tax abolition discussion. The fundamental resolution of the Korea Discount will only be possible when an environment is created that induces long-term investment by retail investors through effective tax benefits and encourages companies to voluntarily and actively enhance shareholder value. At a time when the uncertainty of the global economy is higher than ever, policy consistency and market-friendly system design will be the key variables determining the future of the Korean capital market.