[Insight & Opinion] Inheritance Tax Should Be Adjusted to a Socially Acceptable Level

Introducing Lifetime Tax Deduction
Reducing Resistance and Raising Dividend Payout Ratio

It is said that inheritance tax is too high. Because of this, it is not uncommon for major shareholders to deliberately lower the stock price of the controlling company to reduce inheritance tax. This is why there is a growing argument recently that inheritance tax should be reduced to resolve the so-called ‘Korea Discount.’ However, unconditional tax cuts bring to mind the proverb ‘more interested in the icing than the cake.’

They probably intend to use the ‘Korea Discount’ issue to remove the ‘thorn in the eye’ of wealthy asset holders. The act of major shareholders lowering stock prices through breach of trust or market manipulation should fundamentally be regarded as a criminal act that causes significant harm to minority shareholders. Offering a tax reduction in exchange for refraining from such crimes feels as bizarre as telling a drug dealer, “We will pay for your drugs, so don’t make them.”

It is true that South Korea’s inheritance tax is among the highest within the Organization for Economic Cooperation and Development (OECD) countries. However, there is a special reason why significantly lowering inheritance tax would face considerable resistance here. Real estate-related taxes, such as capital gains tax exemptions on primary residences and low property tax rates, have been so low that many wealthy individuals have accumulated large inherited assets despite paying minimal taxes throughout their lives.

For example, it is common for wealthy individuals to leave behind assets worth tens or hundreds of billions of won without having paid even 10% of that amount in taxes during their lifetime. If inheritance tax were abolished, there is a high possibility that real estate inheritance would continue indefinitely, much like the medieval nobility or Joseon Dynasty yangban class. This would prevent us from escaping the distorted structure where over 70% of household wealth is in real estate. Those who have paid a significant portion of their lifetime income in taxes but have little inheritance left would also find it difficult to accept unilateral inheritance tax cuts.

The author argues for revising the inheritance tax law to maintain the current tax rate but allow a deduction from the inherited assets equivalent to the total amount of income tax, property tax, health insurance premiums, and other taxes paid throughout one’s lifetime. For instance, if a wealthy individual leaves behind assets worth 10 billion won but has paid 4 billion won in taxes over their lifetime, only 6 billion won would be considered as the taxable inherited assets. This approach would face little resistance to tax law reform and could also greatly help with value-up.

From the perspective of major shareholders, since the inheritance tax reduction would be proportional to the dividend income tax currently paid, they would actively distribute idle company funds as dividends. To emphasize once again, if South Korea’s dividend payout ratio increases to levels comparable to other countries, tax revenue would increase, and the effective demand generated by dividend recipients would rise, significantly contributing to gross domestic product (GDP) growth. This method of deducting paid taxes from inherited assets could also greatly reduce asset holders’ resistance to property taxes in the future.

Meanwhile, to solve governance issues related to major shareholders for value-up, we must also break our own fixed ideas about corporate inheritance. Why is it that while Koreans never imagine that the descendants of founders will inherit management rights in leading overseas companies like Microsoft (MS), Apple, Tesla, and Nvidia, they uniquely take for granted the inheritance of management rights in South Korean stock companies? Understanding that the capitalist stock company system was originally designed without considering the inheritance of management rights by direct descendants can help resolve many governance problems arising from inheritance issues.

Seojun Sik, Professor of Economics, Soongsil University