The Tax Reform Proposal for Financial Income and Capital Gain or Loss
Asian Tax Journal Vol. 7 No. 3 (2006), pp. 297-333
Abstract
In this article the authors reviewed the current income taxation of Korea in terms of equity and detailed their review to the income taxation of financial income(or capital income). And they tried to find a way to improve them. Generally speaking the current income taxation on financial income depends on a single tax rate withholding scheme and allows lots of tax reductions and exemptions. Therefore it can be said that the taxation is not perfect in terms of vertical equity as well as horizontal equity. The analysis of these problems more in detail rendered the following findings. First, the threshold amount for global taxation of financial income is set so high as to hinder the vertical equity of income taxation. A single rate of 14% for withholding is applied the same to low income earners that they are not able to utilize the lowest rate of 8% in the basic income tax rate schedule. This also aggravates vertical inequity. Second, there are lots of reductions and exemptions in the taxation of financial income, which hinders horizontal equity. Third, especially the current capital gains tax on securities and financial derivatives disturbs the integrity of income taxation. Based on the findings in the above, the authors are proposing the following improvements. First, the threshold amount for global taxation is recommended to be lowered below 20 million Won from current 40 million Won per person a year. A person with financial income less than the threshold amount should be allowed to elect a global taxation of his financial income. Comparative taxation comparing tax payable amount from global taxation with tax withheld, which sets the lower limit for the tax payable amount for global taxation, should be abolished. It will help simplification of tax procedures. Second, capital gains from securities should be taxed without exceptions. Capital loss from securities should be accordingly allowed to be setoff with capital gains. The limitation on that setoff should be unlifted as far as the government budget allows. Third, income from derivative transactions should also be under taxation. It will help to prevent proliferation of tax avoidance schemes utilizing derivative transactions. The above tax reforms might as well be undertaken incrementally, i.e., step by step. Firstly, each of the first, the second and the third proposal may be implemented separately. And then the tax law may introduce the concept of “financial income” which comprises every item of income or gains from financial assets for global taxation. Lastly, the reform has to be reevaluated with regard to its relations with inheritance tax and gift tax. At this stage, the idea that the point of free transfer of wealth should be deemed as an event of income realization, which rationalizes the deemed capital gains taxation of the property transferred from the perspective of the transferor, may be discussed.
Keywords
- Financial Income
- Capital Gain or Loss
- Global Taxation
- Securities
- Financial Derivatives
Related Articles
A Study on the Global Taxation of Financial Income
14(1) 63-92
The Impact of Investor's Income Taxes on Convertible Bond's Conversion
10(2) 113-137
The Effect of Derivatives on Accounting Value Relevance
20(2) 39-69
Which Becomes more Stabilized by Firm’s Risk Hedging between Accounting Income and Cash Flow?
18(1) 201-235
A Study on the Problem and Improvement of the Derivative Financial Instruments Gain Taxation
16(6) 43-75