Government Reverses Tax Reform Plan After One Month: Where Is It Headed?

"Why did you do that without proper preparation?"

This was President Lee Jae-myung's remark on September 7 regarding the government's proposed changes to the Individual Savings Account (ISA). It was an unusual scene for the president to publicly reprimand the government and order a complete review of the tax reform plan.

The issue began with the ISA. On September 3, the government announced its '2026 Tax Reform Plan,' proposing to establish a new productive finance ISA to stimulate domestic investment while eliminating the carryover of annual contribution limits for existing ISAs and imposing contract duration limits. The intention was to attract funds to the domestic capital market.

However, the market's reaction was not as expected. Investors expressed concerns about whether it was appropriate to reduce benefits for existing ISA holders. There were also worries that this would effectively limit the choices for so-called 'overseas stock investors' (Seohakgaemi).

Following the president's directive for a review, the government changed its stance. In the final tax reform plan confirmed on October 1, it allowed the carryover of contribution limits for existing ISAs and maintained the contract duration indefinitely. The restrictions on the productive finance ISA were also adjusted.

The same was true for real estate taxation. Initially, the government planned to lower the basic deduction for non-resident single-homeowners from 1.2 billion won to 900 million won and raise the tax burden cap to 200%. However, in the final plan, it decided to keep the basic deduction at 1.2 billion won and the tax burden cap at 150%.

In just 29 days since the announcement of the tax reform plan, key elements were reversed. While revising policies is not inherently wrong, it is the government's responsibility to listen to voices from the field and correct problematic systems during the legislative process.

The issue lies in the question, 'Why was it like this from the beginning?'

One of the important values in taxation is predictability. It affects long-term decision-making, from personal asset management to corporate investment and management plans. It is not just about how much taxes will rise or fall this year; there must be a belief in which systems will be maintained in the future for economic actors to adjust accordingly.

In particular, the ISA was created to support long-term asset formation. If the government aimed to attract funds to the domestic capital market with this reform, it should have thoroughly considered how eliminating the carryover of contribution limits and imposing contract duration limits would impact existing participants. This includes assessing the effects on participants with variable incomes, such as self-employed individuals and freelancers, and whether it conflicts with the original purpose of encouraging long-term investment.

Alongside the ISA, the so-called 'stock price suppression prevention law' also became a subject for presidential review. Instead of finalizing related content in the final plan, the government decided to develop reasonable improvements through discussions with the ruling party and during the National Assembly review process. Many of the capital market-related tax policies that were ambitiously introduced have become subjects for modification and supplementation right after their announcement.

The problem arises when such occurrences become repetitive. When the cycle of announcing, facing backlash, and revising continues, what remains for the public is not the intent of the policy but uncertainty regarding government policies.

Moreover, changing tax policies incurs costs when reversed. Individuals who planned investments based on expected tax benefits or businesses that structured management plans based on anticipated changes must adjust their judgments every time policies change. How can the government explain its policy trust when it calls for long-term investment from the public while altering tax directions within a month?

While the government's reversal in response to market feedback could be seen as a success in communication, a better government is one that introduces policies that require fewer reversals from the outset.

Tax reform is akin to a promise made by the government to its citizens. The most significant challenge left by this tax reform is not the issue of tax rates or deduction amounts, but rather how the government will design tax policies based on principles and how consistently it will adhere to those principles in the future.