[Opinion] Inheritance Tax, Corporate Level-Up, and Capital Reallocation

Inheritance Tax Debate Should Be Viewed in a Bigger Picture
Could Be a Decisive Issue for Individual and National Competitiveness

Recently, low PBR stocks have surged in the domestic stock market. When the government announced that it would implement a corporate value-up program benchmarking the Japanese stock market, related stocks rose. The term "Korea Discount" has not just appeared recently in the Korean stock market. However, it has never been the center of attention in the market as it is these days. The controversy over inheritance tax is also heated. There has never been such active discussion about inheritance tax, from tax rates to the scope of subjects. Perhaps one important reason for this controversy is that, due to the rapid rise in housing prices, most houses in the Seoul area have exceeded 1 billion won, making inheritance tax no longer an exclusive issue for the wealthy.

From a broader perspective, underlying these discussions is the social-level issue of "Capital Allocation." Narrowing down to companies, businesses should use the cash generated from operations to increase corporate value. This is a very obvious point. They must decide and allocate whether to invest in organic growth or grow through M&A. When stock value is excessively low, capital allocation can also be made to share buybacks and cancellations, or dividends to shareholders. All these processes aim at one point: increasing corporate value. And shareholders, the owners of the company, should be treated equally according to the number of shares they hold. Conflicts of interest between controlling shareholders and minority shareholders constitute shareholder discrimination. If controlling shareholders take more even when cash is generated from operations, minority shareholders have no reason to hold those shares. It only benefits others. This is why capital allocation and governance are intertwined.

The situation is somewhat different, but individuals and nations are not free from capital allocation issues either. Take aging as an example. Currently, the generation holding the most household financial assets is those in their 60s. Should this capital continue to be held by the 60s generation? Or should capital allocation be changed through intergenerational transfer? The real estate issue also needs to be viewed from a capital allocation perspective. With the aging population increasing and the gap between urban and rural areas widening, is it valid for 70% of the nation's assets to be in real estate in the future? Shouldn't asset allocation be changed even now? Furthermore, should assets be invested only in Korea, or should active global investment be pursued to overcome the waves of low growth and aging? That said, the domestic stock market cannot be excluded. If the capital market loses vitality, the venture and startup markets die because the possibility of being rewarded through stock market listings decreases. The stock market is not simply a place where stock prices go up and down. It is where new companies emerge and continue to receive capital injections, while those losing competitiveness are eliminated. This is how the ecosystem of companies and capital markets works together. If the Korea Discount remains as pronounced as it is now, who would want to invest in domestic stocks? In an era where you can buy stocks worldwide with just one click.

Korean society must reallocate capital in the era of low growth and aging. This is not something that is nice to do but not necessary. Capital reallocation goes beyond the issue of collecting more or less tax. Just as the ultimate goal of corporate capital allocation is to increase corporate value, it can be a decisive issue that determines our lives and, further, the nation's competitiveness. It is regrettable that discussions on inheritance tax, corporate level-up programs, and financial investment taxes proceed without a big picture of capital reallocation in Korean society. Whether supporting or opposing, I hope the discussion will be deep and broad, not viewed only from one's political stance. Fortunately, Japan's experience after its lost 30 years is nearby, so we do not have to start from scratch.

Lee Sang-geon, Head of Mirae Asset Investment and Pension Center