Yoon doubles down on repeal of financial investment income tax

President Yoon Suk Yeol on Thursday expressed a strong willingness to rescind the introduction of capital gains taxes on financial investment incomes, asserting the legislation would bring massive outflow of funds from the country’s capital market.

“Not only is the understanding of 14 million retail investors at stake, but if the capital market collapses and fails to function properly, it will have a significant impact on the real economy,” Yoon said during a press conference marking the second anniversary of his presidency.

“In Korea, dividend income tax and inheritance and gift tax rates are very high compared to advanced countries, but if the capital gain tax is added to it, there will be nothing left for retail investors,” he said.

Yoon has been pushing to abolish the introduction of the financial investment income tax, which means levying a 20 percent tax on capital gains of over 50 million won ($36,550) and a 25 percent tax on earnings exceeding 300 million won from financial investments, including stocks, bonds, funds and derivatives. The plan won bipartisan support in the parliament in 2020 but was postponed until January next year due to outcry from retail investors.

"I strongly ask the National Assembly for cooperation on this issue, and I intend to seek cooperation from the opposition parties," he said.

The main opposition Democratic Party of Korea argues that scrapping the tax plan would weaken tax revenue by as much as one trillion won a year. The country’s fiscal deficit hit an all-time high in the first three months of 2024, according to government data Thursday.

Taking Taiwan’s case as an example, Yoon said the country backtracked its tax scheme similar to the one that Korea is expected to implement as its stock market suffered about a 36 percent plunge in a month after the Taiwanese government announced the plan in 1988.

In line with Yoon's remarks, his administration has shifted its focus to the capital market to reduce dependency on manufacturing as its economy battles an aging population and slowing growth.

They have been seeking to create a new investment wave by initiating a Corporate Value-up Program aimed at resolving deep-seated low valuation of Korean stocks by encouraging listed firms to enhance their governance. Measures unveiled by financial authorities, however, haven't proved attractive to investors here and abroad, as the program runs on a voluntary basis for participating companies with no significant benefits.

Acknowledging market disappointment over plans announced by the Financial Services Commission this month, Yoon said the program will not push businesses to the corner but rather induce their cooperation by providing a favorable environment.

"Intensive policies that the market expects will unfold if you wait a while. The Corporate Value-up Program will proceed steadily and step by step," he said.

Korea, home to the world's leading chipmakers like Samsung Electronics and SK hynix, plans to ease regulations for semiconductor manufacturers’ facility expansions amid fierce global subsidy competition among countries to bring cutting-edge chip development and manufacturing to their soil.

Yoon underlined that the government will put “time efficiency” as a top priority. “We are now thinking of deregulation to support companies to proceed with construction projects at a faster pace including power, water and other infrastructure needed for building chip plants,” he said.

He also hinted at additional tax deduction plans. “As long as the country’s financial position allows, we plan to strengthen our support with tax credits so that the companies do not fall behind in international competition,” he said.

Currently, the government provides tax credits of 15 percent for large companies that have invested in semiconductor facilities and 25 percent for small and medium-sized companies.

Some industry watchers have been arguing that direct financial support, such as the injection of subsidies, is needed rather than tax credit that only supports profitable companies.

On the national pension system, one of Yoon’s key agenda items, the president said he would complete the revamp before the end of his term in 2027.

On Tuesday, a National Assembly committee designed to gather public opinions on national pension reform said it failed to draw a bipartisan agreement on enhancing the financial stability of the system. The national pension fund is forecast to be exhausted by 2055 after experiencing a shortfall starting in 2041, according to the National Pension Service.

The issue would be tossed to the next session of the National Assembly with the newly elected lawmakers' terms starting on May 30.