The South Korean economic sector urged for reforms to the inheritance tax system, citing its hindrance to economic dynamism. They advocated lowering the current maximum inheritance tax rate of 50% to the OECD average of 15% and easing the tax burden on public interest foundations funded by businesses.
In its report on “Issues and Improvement Plans for the Inheritance Tax System” released on May 26, the Korea Chamber of Commerce and Industry (KCCI) said, “South Korea’s maximum inheritance tax rate is 50%, but with the surcharge for major shareholders, the actual rate is about 60%, the highest among the 38 OECD countries.” The report adds that the current tax system impedes economic dynamism more than facilitates wealth redistribution, making substantial reforms inevitable.
The KCCI particularly emphasizes the rapid aging of domestic business managers, highlighting that the direction of inheritance tax policy will significantly impact the South Korean economy in the coming years. An analysis reveals that 79.5% of managers in publicly disclosed enterprises (large corporations) are aged 60 or above, compared to 33.5% in small and medium-sized enterprises (manufacturing).
Domestic and international studies have shown that high inheritance tax rates hinder business investment and job creation. Professor Song Heon-jae of the University of Seoul analyzed OECD data from 1965 to 2013 and found that when inheritance tax revenue increases by 1 trillion won, the economic growth rate drops by 0.63 percentage points. Despite stagnant domestic investment, inheritance, and gift tax revenue surged from 1.5 trillion won in 1997 to 14.6 trillion won in 2022, a 9.7-fold increase.
Conversely, lowering inheritance taxes can boost corporate innovation and contribute to economic growth. A study by the Pi-touch Institute, specializing in SMEs, indicated that reducing the business inheritance tax rate by 30 percentage points in innovative industries like manufacturing and information technology would increase the actual GDP by 6 trillion won and create 30,000 jobs.
The KCCI also argues that the inheritance tax impedes corporate philanthropic activities. Current laws limit the inheritance tax exemption to 5% for stocks donated to public interest foundations affiliated with conglomerates and 10-20% for others. These foundations face restrictions on voting rights for the stocks they hold. It differs from most countries, where donating stocks to such foundations results in complete inheritance tax exemption.
The KCCI proposes abolishing the inheritance tax exemption limit for stocks donated to public interest foundations, reverting to pre-1990 standards. It advocates increasing the exemption limit for voting stocks from the current 10% to 20%. For non-voting stocks, it urges easing the limit from 20% to 35%. In the short term, it recommends reducing the inheritance tax rate to the OECD average of 15%, transitioning to an inheritance acquisition tax system, and abolishing the surcharge for major shareholders. In the medium to long term, it emphasizes the need to abolish the inheritance tax and transition to a capital gains tax, deferred until assets are disposed of to third parties.
This article was originally published on May 26, 2024.
