Korean stocks plummet! The Lee Jae-myung government unexpectedly introduces a tax increase plan, and investors are furious

The campaign promise of "5000 points" is still fresh in our ears, yet a tax increase plan has led to a severe plunge in the South Korean stock market.

Just two months after the new government took office, it unexpectedly introduced a tax increase plan targeting investors and businesses, triggering intense market turbulence and abruptly halting a much-watched stock market rally.

On August 1, South Korea's stock market experienced a Black Friday. The Korea Composite Stock Price Index (Kospi) led the decline in Asian markets, with intraday losses reaching as much as 3.8%, led by heavyweight stocks such as Samsung Electronics and SK Hynix. The South Korean won also fell against the US dollar, dropping by 0.6% to hit a two-month low. This sudden policy shift quickly dampened the confidence of investors who had previously been enthusiastic due to expectations of corporate governance reforms.

This move stands in stark contrast to South Korean President Lee Jae-myung's campaign promise to boost the stock market. After Lee Jae-myung's call for 5000 points, the South Korean stock market briefly entered a technical bull market, although Friday's sharp decline still leaves a year-to-date gain of 30%.

Unexpected Tax Increase Plan

According to a statement released by the South Korean Ministry of Finance on Thursday, the plan includes significantly lowering the threshold for capital gains tax, increasing the securities transaction tax, and raising the maximum corporate income tax rate. This tax increase plan is one of the first major domestic policies introduced by the Lee Jae-myung government, aimed at finding new sources of revenue to fill the budget gap.

Specifically, the proposal plans to lower the threshold for stock capital gains tax from the current 5 billion won to 1 billion won (approximately USD 714,000). At the same time, the securities transaction tax rate will be raised from 0.15% to 0.2%.

Regarding corporate taxes, the government plans to increase the maximum corporate income tax rate from 24% to 25%, reversing the previous government's tax reduction policy. Additionally, new rules for dividend income taxation have been introduced, imposing a 20% tax on dividend income in the range of 20 million to 300 million won, while the tax rate on amounts exceeding 300 million won can be as high as 35%. This series of measures is viewed by the market as a comprehensive tax increase action.

Ten Thousand Retail Investors Petition Against It

This unexpected tax increase plan has severely undermined investor confidence. Seokkeun Ha, Chief Investment Officer of Eugene Asset Management, stated: “The tax proposal has left investors quite disappointed, especially at a time when structural reforms in the South Korean capital market are underway; its introduction is very sudden.” Market consensus originally expected that corporate tax rates would only be moderately increased, accompanied by a new dividend separation tax scheme. Homin Lee, a macro strategist at Lombard Odier in Singapore, pointed out that this proposal constitutes a "negative surprise" to market consensus, making a one-time adjustment in the Kospi index reasonable.

The tax increase plan quickly sparked strong opposition, especially among retail investors. As of Friday afternoon, the number of signatures opposing the capital gains tax proposal on the public petition board of the Korean National Assembly has exceeded 30,000, more than halfway to the 50,000 signature threshold required to trigger a committee review.

Investors and business groups warned that this move could not only alienate a large and influential group of retail investors but also weaken the competitiveness of Korean companies, casting a shadow over the prospects for economic reform.

The Reform Commitment of "5000 Points"

The actions of the Lee Jae-myung government are driven by increasing fiscal pressure. Due to slowing economic growth, corporate tax revenue has significantly declined, creating immense fiscal strain for the government. Lee Jae-myung is seeking to increase subsidies to stimulate consumption, thus urgently needing to explore new revenue sources to support his fiscal commitments.

However, this initiative contradicts his campaign promises.

Lee Jae-myung had promised to improve corporate governance, promote stock market development, and even set a grand goal of pushing the Kospi index to 5000 points, aiming to guide household wealth from real estate to the stock market.

Jung In Yun, CEO of Fibonacci Asset Management Global Pte., commented: "The market focus is shifting towards government policy reforms, but the latest actions are leading to a breakdown of confidence."

After enjoying high approval ratings, this tax increase controversy may weaken Lee Jae-myung's public support and shake the confidence of foreign investors who were optimistic about the Korean market due to reform commitments