[Editorial] Tax reform misstep

Korea Herald

a day ago

Misguided tax policies threaten to derail South Korea's fragile market rebound
The Lee Jae Myung administration's first major tax reform was intended to tackle rising fiscal pressures and address long-standing structural imbalances in South Korea's tax regime. Instead, it has rattled markets, drawn criticism from global financial institutions and exposed fractures within the ruling party.
On Friday, just a day after the blueprint's release, the benchmark Kospi and tech-heavy Kosdaq indices each fell by around 4 percent, a sharp reversal for markets that had only recently begun to regain momentum. Investor sentiment, already tentative, swiftly deteriorated.
At the heart of the controversy are two measures: raising the top corporate tax rate by 1 percentage point to 25 percent and lowering the threshold for capital gains taxation on large shareholders from 5 billion won ($3.6 million) to 1 billion won. These proposals would reverse cuts introduced under the previous Yoon Suk Yeol administration and are projected to raise 8.2 trillion won in additional revenue next year.
Yet the backlash has been swift and pointed.
Critics have highlighted the reform's poor timing, lack of strategic coherence and a clear disconnect from the government's stated goal of capital market revitalization. CLSA described the measures as 'only sticks, no carrots.' Citigroup downgraded Korean equities in its emerging markets portfolio, citing misalignment with Korea's "value-up" initiative. JPMorgan similarly warned that any credible rerating of Korean stocks would require more than cosmetic shifts in policy.
The irony is difficult to overlook. An administration that campaigned on market revitalization — pledging, no less, to drive the Kospi to 5,000 points — now finds itself accused of undermining its own narrative.
Markets reacted unequivocally. Within a single trading session, 116 trillion won in market capitalization was wiped out. This erosion of household and institutional wealth is not merely symbolic; brokerages estimate it could shave more than 8 trillion won off future consumption.
Political consequences have been just as swift. At least 13 lawmakers from the ruling Democratic Party of Korea have raised objections, while senior party figures have contradicted one another over whether the capital gains threshold should be reconsidered. Compounding the confusion are mixed signals from the presidential office, which have further heightened investor anxiety.
Such incoherence is particularly damaging in a market where foreign investors account for nearly a third of all trading volume. These stakeholders depend not just on fundamentals, but on clarity, consistency and credible policymaking.
Many observers argue the reforms stray from international norms. The dual imposition of capital gains and transaction taxes is widely viewed as excessive, particularly in comparison to major markets that opt for one or the other. The revised threshold for large shareholders is also seen as overly aggressive.
Meanwhile, long-promised dividend tax relief has proved underwhelming, as it is narrowly targeted and still capped at a steep 35 percent, well above the 25 percent ceiling proposed in April by Democratic Party lawmaker Lee So-young.
More fundamentally, the reform poses a critical question: Must fiscal consolidation come at the expense of market stability? In an open, export-driven economy exposed to global volatility, US tariffs and rising geopolitical risk, abrupt shifts in tax policy could alienate the very investors South Korea seeks to attract.
President Lee is right to stress the importance of fiscal discipline. But credibility rests not only on budget arithmetic — it also depends on coherence. South Korea needs tax reform. What it does not need is a policy lurch that unsettles markets, contradicts strategic priorities and undercuts investor trust.
If the Lee administration is serious about building a more dynamic, investment-friendly economy, it must steer clear of ad hoc reversals and restore clarity to its reform agenda.