South Korea's Kospi Index Plummets 2.5% as New Tax Plan Shocks Investors

The South Korean stock market experienced a significant downturn on August 1, with the benchmark index, Kospi, leading the decline in Asian markets. The sudden drop was triggered by the government's unexpected announcement of a new tax plan, which included substantial changes to capital gains tax, securities transaction tax, and corporate income tax rates. This move, just two months into the new administration, has left investors disheartened and has raised concerns about the government's commitment to its election promises.

The tax plan, announced by the finance ministry, proposes to lower the capital gains tax threshold from 50 billion won to 10 billion won, increase the securities transaction tax rate from 0.15% to 0.2%, and raise the highest corporate income tax rate from 24% to 25%. Additionally, new tax rules for dividend income have been introduced, with rates ranging from 20% to 35% depending on the income bracket. These changes are part of the government's efforts to secure new revenue sources to fulfill its fiscal commitments and bridge budget gaps.

Investors have expressed strong opposition to the tax plan, with over 30,000 signatures collected on a public petition against the capital gains tax proposal. The sudden nature of the announcement has caught many off guard, leading to a loss of confidence in the market. Market analysts had expected a more gradual increase in corporate tax rates, accompanied by new dividend tax separation schemes. The current proposal has been seen as a negative surprise, leading to a one-off adjustment in the Kospi index.

The tax plan has also raised concerns about its potential impact on the economy. Critics warn that it could alienate a large and influential group of individual investors and weaken the competitiveness of South Korean companies, casting a shadow over the prospects for economic reform. The government's move comes at a time of increasing fiscal pressure, with slowing economic growth and declining corporate tax revenues. The administration is seeking to boost consumption through increased subsidies, necessitating new revenue streams to support its fiscal promises.

However, the tax plan contradicts the government's election pledges, which included promises to improve corporate governance, promote stock market development, and even set a target of pushing the Kospi index to 5000 points. These promises were aimed at guiding household wealth from real estate to the stock market. The recent tax announcement has raised questions about the government's commitment to these reforms and has the potential to erode public support and foreign investor confidence in the South Korean market.