[Tax Story] The Reason for the Existence of Inheritance Tax

Professor Ahn Chang-nam, Department of Economics and Taxation, Gangnam University

Recently, there has been much debate regarding inheritance tax following the death of a certain conglomerate chairman. A common argument is that if the inheritance tax is too high, the inheritor must sell the inherited company (shares) to pay the tax, which threatens management control and does not benefit the national economy in any way. However, Article 119 of the Constitution of the Republic of Korea mandates the state to "maintain an appropriate distribution of income," so inheritance tax cannot be abolished or revised to the extent that the meaning of distribution is lost. The Constitutional Court has also interpreted the inheritance tax system as having the purpose of "alleviating the eternal inheritance and concentration of wealth through property inheritance in accordance with the constitutional ideals of a social market economy order, thereby promoting economic equality among the people" (96HunGa19). Inheritance tax aims to ensure "equality at the starting point" when young people begin their social lives. In a 100-meter race, if some start at the starting line while others are already at the 90-meter mark, this is far from the "fairness" mentioned in the Constitution. Fairness means treating the same equally and the different differently, implying that the greater the inherited property, the higher the tax burden should be.

The inherited property received by the heir is income received without compensation. Some countries tax this as income tax, some like Korea impose inheritance tax, and others tax it as capital gains tax by considering the transfer from the decedent to the heir. Most OECD member countries tax inherited property using one of these methods. From this perspective, arguments that Korea should abolish or ease inheritance tax because foreign countries do not have inheritance tax or have low rates are shortsighted.

Franklin Roosevelt, the 32nd President of the United States, in a congressional speech advocating the introduction of a progressive estate tax (Revenue Act of 1935, top rate 75%) to address deepening economic imbalance after the Great Depression in 1929, emphasized, "Just as our forefathers who founded this country rejected the inheritance of political power, today we reject the inheritance of economic power." He persuaded the public by presenting his own standard of fairness.

Recently, French economist Thomas Piketty, in his book Capital and Ideology, proposed providing young people at the starting line of social advancement with capital equivalent to 60% of the average adult wealth in that country (120,000 euros per person, approximately 160 million won) to address economic inequality. Korea is also experiencing worsening income inequality amid the COVID-19 pandemic. Without resolving this, achieving social harmony will be difficult.

Inequality weakens social cohesion and intensifies status insecurity and stress among members. This does not mean everyone should live in apartments of the same size. It means securing resources to provide everyone with "as much as they need and can use." Relative equality, not absolute equality, must be sustained. The wealth and property enjoyed by the rich are mixed with the tears and sighs of the poor. A significant portion of the country’s tax revenue, which is the foundation of national finances, comes from corporations. Therefore, the argument that the tax system should be operated to enable companies to maintain international competitiveness deserves attention. On the other hand, the stability of corporate governance and the inheritance tax burden on heirs should be distinguished. Issues in corporate governance that may be shaken by inheritance tax payments should be resolved through the Commercial Act by means such as dual-class voting systems, not through tax law. Also, the installment payment period for inheritance tax, currently up to 20 years, should be extended differentially depending on the amount of inheritance tax.