Globalization of economies, particularly the increase in cross- border capital movement, has brought about accelerated international tax competition among countries. The recent changes in market structure and the rapid accumulation of capital assets in the Korean economy mean that the capital gains taxation should also be revised with respect to both efficiency and equity. Taxation on capital gains is levied when capital assets are liquidated. Therefore it is important to appropriately determine the objects of taxation, the tax structure and tax rate, by considering tax administration issues as well as the tax burden on tax payers.

There have only been a few studies examining the effects of capital gains taxation on the Korean economy, and this has largely been due to data constraints. one of the motivations for this study is to review existing literature on capital gains taxation and to examine its characteristics theoretically and institutionally. This paper discusses the major perspectives and discussions regarding capital gains taxation. Using a general equilibrium model with individual optimization and firm-value maximization, the effects of capital gains taxation are analytically examined. According to steady state analysis, introducing capital gains taxation into the economy is assumed to be neutral to both the steady state level of capital stock and labor.

Another motivation of this study is to figure out the appropriate direction that Korean capital gains taxation should be applied. Capital gains taxation in Korea was used mostly to suppress speculation in the real estate markets. Capital gains tax on stocks and bonds transfers has been imposed only partially and inconsistently, and have also gone against the capital gains tax principles. There have also been constraints in horizontal as well as vertical equities due to the various tax free and tax exemption articles. Furthermore, in reality, the high instabilities in both the Korean stocks and bonds markets have acted as obstacles to introducing some basic forms of capital gains taxation.

Capital gains taxation in Korea requires various changes to improve both its efficiency and equity. In particular, compre- hensive tax on capital gains of stocks and bonds transfers on top of the real estates transactions should be gradually introduced. Furthermore, capital losses need to be acknowledged in order to maintain the able-to-pay tax principle. The tax free principle for ‘one household-one housing’ needs to be converted to comply with the taxing principle, but care should be taken such that the actual tax burden is not increased by allowing sufficient tax deductions, such as housing deduction and long-term housing possession deduction.