“Losing principles while reading the room.”

The Lee Jae-myung administration’s first tax reform proposal is facing criticism for what is being called a “retreat in asset taxation.” When 14 million stock investors strongly opposed tightening the criteria for major shareholders subject to capital gains tax, the government and ruling party began a review, and real estate taxation was left out of the plan entirely. Critics say the government should uphold the principle and roadmap of “taxing where there is income” in areas like real estate and stocks and persuade the public accordingly.

Taxation on financial assets has been stagnant for years. The dispute over the criteria for major shareholders subject to capital gains tax in this reform stems from the failure to introduce a comprehensive financial investment income tax. The current approach, imposing taxes only on major shareholders holding above a certain amount on a specific date (December 31) while exempting most retail investors from tax on stock gains, runs counter to fundamental tax principles.

The previous Moon Jae-in administration’s push to tax stock capital gains through the financial investment income tax was repeatedly postponed and ultimately scrapped late last year under the Yoon Suk-yeol administration with the Democratic Party of Korea’s agreement. This contrasts with major economies like the U.S., Japan, and the U.K., which tax capital gains on listed shares.

The same applies to virtual assets such as Bitcoin. Taxation, initially scheduled for 2022, has been deferred until 2027 due to concerns over insufficient tax infrastructure and market disruption. Although the policy was intended to improve fairness and normalize capital gains taxation, there is no sign of implementation, with proponents citing young people’s need to build assets. Countries such as the U.S., U.K., Germany, and Japan already levy taxes on such gains as part of income tax.

This year’s reform further widens loopholes in financial asset taxation by introducing a separate taxation system for dividend income, taxing it at 38.5 percent instead of the current combined rate of 49.5 percent, without aggregating it with other income. Critics argue that applying separate taxation solely to dividend income is inconsistent with other tax categories and that the government should have taken the straightforward approach of setting a timetable for introducing the financial investment income tax.

Real estate holding taxes were also excluded from this year’s reform. Experts point out that the policy goal of such taxes in Korea focuses too narrowly on “short-term market stabilization,” rather than “reducing inequality” or “broadening the tax base.” Hong Jeong-hoon, a senior researcher at the Korea Center for City and Environment Research, said, “From the perspective of universal taxation, the government should move toward aligning official real estate valuations with market prices and scaling back excessive tax benefits for single-home owners.”

Korea’s real estate holding taxes remain relatively low compared to other advanced economies. According to an analysis by the “Institute of Land and Liberty” of the effective real estate holding tax rates in major Organization for Economic Cooperation and Development (OECD) countries from 2021 to 2022, Korea’s rate, measured as a share of the total value of privately held real estate, was 0.21 percent, lower than the OECD-15 average of 0.24 percent. Such low property taxes also make it harder for capital to flow into the stock market.

The effective real estate holding tax rate rose from 0.12 percent in 2005 to 0.17 percent in 2008 following the introduction of the comprehensive real estate tax, but has since fluctuated with political shifts. The Lee Myung-bak administration’s easing of the tax reduced it to 0.14 percent in 2009, while the Moon Jae-in administration raised it back above 0.20 percent. Under the Yoon administration, higher exemption thresholds for the comprehensive real estate tax and reductions in property tax are expected to have lowered the rate again.

In capital markets, analysts note that real estate investment is more advantageous than stock investment from a tax perspective. In their “5000 Build-up” report released on August 8, Hanwha Investment & Securities researchers Park Seung-young and Kim Soo-yeon wrote, “Currently, dividend income below 20 million won is still taxed at 15.4 percent, but rental income below 20 million won from housing is tax-exempt.”

With asset taxation stalled, the share of labor income tax in total tax revenue is rising. According to the National Assembly Budget Office, income tax accounted for 19.8 percent of total tax revenue in 2023, up from 16.3 percent in 2014. This increase is far greater than that of the OECD average (0.8 percentage points) and the G7 average (2.8 percentage points) over the same period. Although the effective income tax rate remains below the OECD average, the rapid growth in the share of labor income tax suggests the proportion will continue to rise.

Yoo Ho-rim, professor of taxation at Kangnam University, said on August 10, “In a situation where capital is flowing overseas due to tariff-related factors, normalizing real estate taxation is necessary to strengthen the tax base.” He added, “If ‘revitalizing the stock market’ is the policy goal, the government should offer incentives such as easing major shareholder criteria for capital gains tax and cutting transaction taxes, while pushing for the introduction of the financial investment income tax over the long term.”