🚨 Dividend Income Tax Cut Debate

Today Korean Economic News for Beginners | 2025.11.10

0️⃣ Tax Break for the Wealthy vs. Stock Market Boost - Tax Fairness Controversy Intensifies

📌 35%→25% Cut Proposal Advances…Opposition: "Special Benefit for Top 1%"

💬 The government and ruling party are pushing to lower the maximum separate taxation rate for investors earning over 300 million won annually in dividend income from the current 35% to 25%, a 10 percentage point reduction. This is the second major stock market tax relief measure following last year's abolition of the financial investment income tax. The government argues it's "necessary to activate dividend investment and resolve the Korea Discount," but opposition parties and civic groups criticize it as "a typical tax cut for the wealthy that benefits only the top 0.1%, as annual dividend income of 300 million won means holding stock assets worth over 10 billion won." Notably, those earning over 300 million won in dividends account for only 0.05% of all dividend earners, yet their dividend income represents over 30% of the total. Experts worry that "it's uncertain whether the tax cut will lead to stock market activation and may only increase tax fairness controversy."

1️⃣ Easy Explanation

If you own stocks, you can receive part of a company's profits as "dividends." But dividends are also taxed, and now the government wants to give big tax breaks to people who receive huge amounts of dividends, sparking a "tax cuts for the rich" controversy.

Let me first explain what dividends are. If you own shares in companies like Samsung Electronics or Hyundai Motor, when the company does well and makes a lot of money, it shares part of that profit with shareholders. That's a dividend.

For example, let's say Mr. A owns 100 shares of Samsung Electronics. If Samsung pays 10,000 won per share in dividends, Mr. A receives 1 million won. This money isn't his salary from working—it's "capital income" he gets from owning stocks.

The problem is that dividends are also taxed. Korea has two ways to tax dividends.

The first is "comprehensive taxation." This combines dividends with other income like salary or business income to calculate taxes. This method is better when your dividend income is small.

The second is "separate taxation." This taxes only the dividends separately. People with large dividends can choose separate taxation up to a certain amount because comprehensive taxation would result in too much tax.

Let's look at the current system more closely. Annual dividend income up to 20 million won can be taxed separately at a 14% rate. If you earn more than 20 million won, you must use comprehensive taxation, where the rate goes up to a maximum of 49.5% (45% income tax + 4.5% local income tax).

But a new rule started in 2023. People earning over 300 million won annually in dividends can use separate taxation, but at a 35% rate. It's lower than comprehensive taxation (maximum 49.5%) but much higher than basic separate taxation (14%).

What the government is proposing now is to lower this 35% to 25%. That's a big tax cut of 10 percentage points.

So how much money is 300 million won in dividend income? Assuming Samsung Electronics' dividend yield is about 3%, to receive 300 million won in dividends, you'd need to own about 10 billion won worth of Samsung stock. Other companies like Hyundai and SK Hynix are similar. In other words, people earning over 300 million won in dividends are ultra-wealthy with at least 10 billion won in stock assets alone.

The statistics make this even clearer. Among all dividend earners, only 0.05% receive over 300 million won annually. That's about 5 out of 10,000 people. But their total dividend income accounts for over 30% of all dividends. This means a small number of super-wealthy people take a huge portion of dividend payments.

Why is the government pushing this tax cut? They give three main reasons.

First, to activate the stock market. The logic is that lowering taxes will increase investment in dividend stocks, bringing more money into the stock market and reviving it. With Korean stocks performing poorly and individual investors flocking to U.S. stocks, this is meant to revive the domestic market.

Second, to encourage long-term investment. Dividend stocks are usually stable large-cap stocks, and investing in them means holding long-term to receive steady dividends rather than short-term trading. Lowering taxes is expected to increase such long-term investment.

Third, to resolve the Korea Discount. There have long been complaints that Korean stocks are undervalued compared to their performance. One reason is low dividend payouts and high dividend income taxes. The logic is that lowering dividend taxes will make companies pay more dividends, which will raise stock prices.

But opposition parties and civic groups are strongly objecting. Their main arguments are:

First, it's a tax cut for the wealthy. As mentioned, people earning over 300 million won in dividends have over 10 billion won in stock assets. Giving tax benefits to these people deepens wealth inequality and harms tax fairness. A minimum wage worker earns about 20 million won working all year, yet people who receive 300 million won just from owning stocks get their taxes cut—is that fair?

Second, the effect is uncertain. Will the stock market really revive from lowering taxes? Past cases show tax benefits alone have rarely caused significant stock market rebounds. Stock markets move based on company performance, global economic conditions, interest rates, and many other factors. Lowering taxes by a few percent probably won't suddenly make investors buy lots of Korean stocks.

Third, the fiscal burden. Cutting taxes means the government collects less revenue. The Ministry of Economy and Finance estimates this tax cut will reduce annual tax revenue by about 200 billion won. With government finances already tight, is it right to give up 200 billion won in tax revenue just to cut taxes for the super-wealthy?

Fourth, fairness compared to other income. Salaried workers pay up to 49.5% in income tax, but people making money from stocks only pay 25%? Is that fair? Of course, capital income and earned income are different in nature, but if the rate gap is too large, it creates a perception that "working people are suckers."

What about overseas cases? The U.S. applies a maximum 20% rate on dividend income. Japan applies 20.315%. At first glance, Korea's 35% seems high. But there's an important difference. The U.S. and Japan apply the same rate to all dividend income, while Korea charges only 14% up to 20 million won. Also, in the U.S., you must hold stocks for over a year to get the lower rate, but Korea applies it regardless of holding period.

Another point to consider is corporate tax. Companies first pay corporate tax on profits, then pay dividends with what's left. Then shareholders pay tax again on those dividends. This is called "double taxation." Many countries keep dividend income taxes low to reduce this double taxation. Korea also has a dividend tax credit system, but it only applies when using comprehensive taxation.

Ultimately, the core of this controversy is whether to prioritize the economic goal of "stock market activation" or the social value of "tax fairness."

2️⃣ Economic Terms

📕 Dividend Income

Dividend income is the profit distribution that shareholders receive from companies for holding their stocks.

• Companies return part of their business profits to shareholders in cash or stock.
• Dividend yield is calculated as "dividends as a percentage of stock price" and is usually 2-4%.
• Dividend income is classified as "capital income" rather than earned or business income, with separate tax rates applied.

📕 Separate Taxation

Separate taxation means taxing specific income separately without combining it with other income.

• Unlike comprehensive taxation, it doesn't combine with other income, which can lower the tax rate.
• Currently, dividend income up to 20 million won can be taxed separately at 14%, while over 300 million won is taxed at 35%.
• The downside of choosing separate taxation is you can't receive tax credits or income deductions.

📕 Korea Discount

Korea Discount refers to Korean companies being undervalued relative to their performance.

• Even with similar profit levels, Korean companies have lower stock prices than U.S. or Japanese companies.
• Main causes include low dividend payouts, unclear governance structures, and geopolitical risks.
• A typical example is Samsung Electronics' PER (price-earnings ratio) of 15x versus Apple's over 30x.

📕 Tax Fairness

Tax fairness is the principle that taxes should be imposed fairly according to income level and ability to pay.

• Horizontal equity: People with the same ability should pay the same tax.
• Vertical equity: People with greater ability should pay more tax.
• Tax cuts for high-income earners can be criticized for violating vertical equity.

3️⃣ Principles and Economic Outlook

✅ Stock Market Impact of Tax Rate Cuts

• Whether dividend income tax cuts will actually lead to stock market activation is uncertain, and even if there is an effect, it's likely to be limited.

  • First, while incentives to invest in dividend stocks increase, the impact on the overall market is limited. When the rate drops from 35% to 25%, after-tax dividend returns increase by about 15%. For example, someone receiving 300 million won in pre-tax dividends currently pays 105 million won in tax and receives 195 million won, but after the revision would pay 75 million won in tax and receive 225 million won. That's 30 million won more. This clearly increases the attractiveness of dividend stock investment. But the problem is that very few people benefit from this. Will the overall market revive just because ultra-wealthy investors representing 0.05% of all investors buy a bit more dividend stocks? Many are skeptical.

  • Second, it could lead to increased corporate dividends, but not immediately. The government argues that lowering dividend taxes will incentivize companies to pay more dividends. The logic is that shareholders will demand more dividends as their after-tax returns increase, and companies will respond. Indeed, Korean companies' dividend payout ratios (the percentage of profits paid as dividends) are 20-30%, lower than the U.S. (40-50%) or Japan (30-40%). But corporate dividend policies are more influenced by investment plans, cash holding strategies, and major shareholders' intentions than by taxes. Tax rate changes alone are unlikely to significantly increase dividends in the short term.

  • Third, foreign capital inflow effects are expected to be minimal. Some expect that lowering dividend taxes will make foreign investors buy more Korean stocks. But foreign investors are often subject to their own country's tax laws, not Korea's dividend income tax. Also, their investment decisions are more influenced by company growth potential, exchange rates, and geopolitical risks than by taxes. Past Korean tax incentives haven't led to dramatic increases in foreign investment.

• Tax rate cuts are positive for dividend stock investors but are unlikely to be the decisive factor in reviving the overall market.

✅ Tax Fairness and Social Acceptance

• Tax cuts focused on high-income earners raise tax fairness controversies and can lower policy social acceptance.

  • First, benefits concentrated on the top 0.05% of income earners deepen wealth polarization. People earning over 300 million won in dividends have over 10 billion won in stock assets alone. Cutting their taxes by 10 percentage points effectively channels more money to the wealthy. For example, someone with 1 billion won in dividend income saves 100 million won annually from this tax cut. Meanwhile, regular investors with dividend income under 20 million won already pay a 14% rate and get no additional benefits. Ultimately, only the rich get richer.

  • Second, the tax burden gap with wage earners widens. Korea's maximum income tax rate is currently 49.5% (45% income tax + 4.5% local income tax). High-income office workers earning over 100 million won annually pay nearly half in taxes. But someone earning 1 billion won annually from stocks only pays 25%. Charging 49.5% tax on money earned from work but only 25% on money earned from stocks—is that fair? Of course, capital income and earned income differ in nature, and capital income carries risks, so lower rates may be reasonable. But if the gap is too large, it can spread the perception that "workers are losing out."

  • Third, tax cuts during fiscal shortages inevitably reduce other welfare budgets. This tax cut is estimated to reduce annual tax revenue by about 200 billion won. With 200 billion won, you could expand free daycare, increase youth housing support, or create senior jobs. The government is currently cutting various welfare programs due to fiscal deficits. In this situation, fundamental questions arise about whether giving up 200 billion won to cut taxes for the super-wealthy is the right choice.

• Tax policy must consider not only economic efficiency but also social fairness, and this tax cut proposal greatly sacrifices the latter.

✅ Long-term Capital Market Development Strategy

• More fundamental capital market reforms are needed beyond dividend tax cuts, and fragmented tax benefits alone have limitations.

  • First, corporate governance improvements must come first. The root cause of the Korea Discount isn't high taxes but unclear governance structures. As long as problems persist like major shareholders controlling companies with small stakes, favoring affiliated companies, and unfair inter-company transactions, foreign investors will inevitably undervalue Korean stocks. That's why Samsung Electronics, despite its excellent performance, doesn't get valued as highly as Apple. More important than cutting taxes is aligning voting rights with economic rights, strengthening minority shareholder rights, and increasing outside director independence.

  • Second, a long-term strategy to improve dividend culture is needed. Korean companies' low dividend payouts are more about management practices and culture than taxes. Many companies hoard cash but don't return it to shareholders. This is because major shareholders prefer share value appreciation over dividends (because more dividends mean more taxes for major shareholders too). If the government really wants to increase dividends, it should consider policies like mandatory dividends or active share buybacks rather than tax benefits. For example, mandating minimum dividend ratios for companies above a certain size or giving tax benefits for share buybacks might be more effective.

  • Third, individual investor protection and financial education must be strengthened. To revive the stock market, we need to create an environment where more individuals can invest with confidence. But Korean markets still have serious problems with unfair short selling, manipulation groups, and false information. As long as individual investors feel that "Korean markets only hurt retail investors," increasing investment won't happen no matter how much taxes are cut. Market surveillance must be strengthened, unfair trading severely punished, and investor education expanded first.

• For sustainable capital market development, institutional improvements and cultural changes are needed rather than tax benefits.

4️⃣ In Conclusion

The debate over cutting tax rates for those earning over 300 million won in dividends shows the sharp conflict between "stock market activation" and "tax fairness."

The government and ruling party's logic is clear. With the stock market struggling and individual investors fleeing overseas, they must lower dividend taxes to increase investment incentives and promote long-term investment. They argue it's also necessary to resolve the Korea Discount and increase corporate dividends.

But opposition parties and civic groups also make persuasive arguments. Dividend income of 300 million won means stock assets over 10 billion won, benefiting only the top 0.05% of super-wealthy investors. Is it fair that wage earners pay up to 49.5% in taxes while capital income earners pay only 25%? Should we give up 200 billion won in tax revenue for tax cuts for the rich during fiscal difficulties?

Economic analysis is also skeptical of the tax cut's effects. Past cases show tax benefits alone have rarely activated stock markets. Stock markets move based on company performance, global economy, interest rates, and various other factors, and fundamental changes are hard to achieve by adjusting rates by a few percentage points.

More importantly, the real causes of the Korea Discount aren't taxes but structural problems like governance structures, dividend culture, and inadequate investor protection. The market won't revive just by lowering taxes without solving these fundamental problems.

How should individual investors view this? If you're an ultra-wealthy person earning over 300 million won in dividends, this tax cut is certainly good news. But for most regular investors, there's little impact. Those earning under 20 million won in dividends already pay a 14% rate, and those earning between 20 million and 300 million won use comprehensive taxation, making this revision irrelevant.

For young professionals or financial beginners, several lessons can be learned from this controversy. First, taxation isn't simply a rate issue but a balance between social values and economic goals. Second, rather than believing government policy announcements at face value, we must critically examine who actually benefits and where the funding comes from. Third, stock market activation can't be achieved through taxation alone and requires more fundamental structural improvements.

Policymakers need a more careful approach. If market stimulation is urgent, they should consider policies that middle-class investors can also feel rather than rate cuts that only benefit a few wealthy people. For example, expanding tax benefits for small investors, preferential treatment for long-term investment, or expanding pension savings might be more desirable.

Ultimately, this controversy poses a fundamental question about what balance Korean society will find between "growth" and "distribution," between "efficiency" and "equity." Taxes aren't simply a means of raising revenue but a mirror reflecting the values society pursues.

View Table of Contents

• Go to Guide