In Korea's current investment market, there is intense interest surrounding whether the Financial Investment Income Tax should be implemented, delayed, or repealed.

The term “financial investment income” refers to income realized from investing in financial products with a risk of principal loss, such as stocks, bonds, funds, and derivatives (excluding interest and dividend income). The Financial Investment Income Tax (hereafter referred to as “FIIT”) is a tax imposed on annual financial investment income that exceeds a certain threshold, with income divided into Group 1 and Group 2 categories. Group 1 includes domestic listed stocks, while Group 2 encompasses off-market transfers of listed stocks, foreign stocks, and fund profits.

Previously, general investors who were not major shareholders were exempt from taxes on capital gains from domestic stock transactions. However, under the FIIT, domestic stock gains exceeding 50 million won annually and foreign stock gains over 2.5 million won will be taxed. The tax rate is set at 22% for income up to 300 million won, and 27.5% for income above 300 million won.

For instance, if an investor earns 70 million won from domestic listed stocks, currently, they pay no tax. But if the FIIT is implemented, they will be taxed 22% on 20 million won after a 50 million won deduction, resulting in 4.4 million won in tax. In another case, if an investor makes 100 million won in domestic stocks but incurs a 10 million won loss in a domestic equity public offering fund, the taxable income would be 40 million won after deducting 50 million won from the total realized gains of 90 million won.

There is a division of opinion on the FIIT among politicians, stakeholders, and the general public. Opponents argue that increased taxes on high-level investors could reduce financial investment, potentially cooling the market and shifting funds to real estate, which could drive up real estate prices. They also contend that the FIIT will require financial institutions to withhold taxes directly from investment income at the source, which could reduce investor liquidity and weaken the stock market. Another concern is that under the FIIT, taxes on private equity funds, typically invested in by the wealthy, could drop from a maximum rate of 49.5% to 27.5%. Currently, dividends and capital gains over 20 million won from private equity funds are subject to a comprehensive financial tax rate of up to 49.5%. However, with the FIIT, the funds will fall under Group 1, reducing the maximum tax rate to 27.5%, raising concerns over preferential tax treatment for the wealthy.

On the other hand, supporters of the FIIT cite tax equity and increased revenue as reasons for support. They expect that, with the implementation of the FIIT, the top 1% of investors (approximately 150,000 individuals) would be subject to tax payments, and it is estimated that taxing these high-level investors would increase annual tax revenue by 1.6 trillion won.

Initially scheduled for implementation in January 2023, the FIIT was postponed for two years with the agreement between the ruling and opposition parties and was slated to start next January. However, on July 25th this year, the government announced plans to repeal the FIIT, with the ruling party supporting the repeal and the opposition leaning towards a delay or repeal.

According to The Dictionary of Current Affairs, in his work The Wealth of Nations, Adam Smith, founder of classical economics, proposed the four principles of taxation: the Principle of Fairness (Taxes should be proportional to income, without everyone contributing according to their ability, without recognizing privileged classes); the Principle of Certainty (The tax method, timing, and amount should be simple and clear so that all, including the taxpayer, understand it, free from any subjective control by the tax collector); the Principle of Convenience (Taxes should be collected at the time, place, and method most convenient for taxpayers); the Principle of Efficiency (Tax collection costs should be minimized).

At this critical juncture of deciding between the implementation, repeal, or delay of the FIIT, perhaps political figures and stakeholders should revisit the four principles of taxation outlined in The Wealth of Nations.