Seoul: The Lee Jae Myung administration's first major tax reform, intended to tackle fiscal pressures and address structural imbalances, has instead rattled markets and drawn criticism from global financial institutions. The reform has also exposed fractures within the ruling party.
According to Yonhap News Agency, the benchmark Kospi and tech-heavy Kosdaq indices fell by around 4 percent just a day after the reform blueprint's release. This marked a sharp reversal for markets that had recently begun to regain momentum, with investor sentiment deteriorating swiftly.
Central to the controversy are proposals to raise the top corporate tax rate by 1 percentage point to 25 percent and lower the threshold for capital gains taxation on large shareholders from 5 billion won ($3.6 million) to 1 billion won. These measures aim to generate an additional 8.2 trillion won in revenue next year, reversing cuts from the previous Yoon Suk Yeol administration.
Critics argue that the reform's timing and lack of strategic coherence are problematic, diverging from the government's goal of capital market revitalization. CLSA described the measures as "only sticks, no carrots," while Citigroup downgraded Korean equities in its emerging markets portfolio. JPMorgan also noted that credible rerating of Korean stocks required more than cosmetic policy changes.
The market response was stark. Within a single trading session, 116 trillion won in market capitalization was wiped out, potentially reducing future consumption by over 8 trillion won.
The political fallout has been swift, with at least 13 lawmakers from the ruling Democratic Party of Korea raising objections. Senior party figures have contradicted each other on reconsidering the capital gains threshold, compounded by mixed signals from the presidential office.
Observers highlight that the reforms deviate from international norms. The dual imposition of capital gains and transaction taxes is viewed as excessive compared to major markets. The revised threshold for large shareholders is also seen as aggressive.
Additionally, promised dividend tax relief has been underwhelming, narrowly targeted and capped at a steep 35 percent, despite a proposed 25 percent ceiling by Democratic Party lawmaker Lee So-young in April.
The reform raises a critical question: Must fiscal consolidation come at the expense of market stability? In an open, export-driven economy exposed to global volatility, abrupt tax policy shifts could alienate investors.
President Lee emphasizes fiscal discipline's importance, but credibility also relies on coherence. While South Korea needs tax reform, it requires policies that stabilize markets and align with strategic priorities to maintain investor trust.
If the Lee administration is committed to a dynamic, investment-friendly economy, it must avoid ad hoc reversals and restore clarity to its reform agenda.