"College Student Advocates '100% Inheritance Tax,' Economic Expert's Sharp Rebuttal [Seungseop Song's Financial Light]"

South Korea's Inheritance Tax Rate Ranks 2nd Among OECD Countries
Criticism Over Business Distortion and Middle-Class Burden
Inheritance Tax Cut Called 'Tax Break for the Wealthy'
Active Debate on Changing Inheritance Tax to Inheritance Acquisition Tax

Milton Friedman, Nobel Prize winner in Economics (left), answering a question from a young man after giving a lecture titled "What is America?" at the University of Chicago in 1978. Photo by Free To Choose Network

"In a capitalist system, shouldn't wealth be forcibly redistributed before profit-making activities? The way to redistribute wealth without affecting the incentive to pursue profits is to impose a 100% inheritance tax."

In 1978, a renowned economist gave a lecture at the University of Chicago in the United States. After the roughly one-hour lecture, a young man asked a question. He argued that since capitalism inevitably creates unequal starting points, only by redistributing wealth through high inheritance tax rates can fair competition be achieved. The professor conducting the lecture countered, "If you impose a 100% inheritance tax, people will waste their wealth on luxury." This professor was none other than Milton Friedman, who elevated the framework of liberal market economics and later won the Nobel Prize in Economics.

Now, more than 40 years later, the inheritance tax debate has ignited in South Korea. From those who pay the inheritance tax to the tax rates and taxation methods, the issue is on the table. Discussions are heated not only at the Presidential Office but also at the Ministry of Economy and Finance, which oversees tax policy, and the National Assembly, the legislative body. Why has inheritance tax become such a hot topic in South Korea's tax system?

In South Korea, the tax rate varies according to the amount inherited. The inheritance amount is divided into five brackets. If the taxable base is 100 million KRW or less, the lowest tax rate of 10% applies. The tax rate increases by 10 percentage points with each bracket, and if the amount exceeds 3 billion KRW, a 50% tax rate applies. For major shareholders of large corporations, 20% of the inherited shares are surcharged, which can raise the top tax rate to as high as 60%.

Those advocating for changes to the inheritance tax focus on South Korea's high tax rates. South Korea's top inheritance tax rate is among the highest compared to other countries. The average top rate among OECD member countries is about 26%. Many countries do not have inheritance tax at all. In contrast, South Korea's inheritance tax rate is second only to Japan's 55%. France's rate is 45%, the US and the UK are at 40%, and Germany's is 30%.

Why is a high inheritance tax rate a problem?

But why is a high inheritance tax rate problematic? Isn't it natural for those who inherit a lot of money to pay more taxes? In response to this claim, companies criticize that high inheritance tax rates distort management. When passing on management rights and family businesses to their children, they have to pay huge inheritance taxes, which can destabilize the company's shareholding structure. There are also criticisms that business owners do not manage the stock prices of listed companies because of the inheritance tax burden. Since stock prices rising means paying more inheritance tax later, they do not try to raise their company's stock price. When the government recently promoted the 'Corporate Value-Up Program,' inheritance tax was cited as a cause of undervaluation in the Korean stock market.

Many Korean companies have actually struggled during the inheritance process. Samsung Electronics is a representative example. The heirs of the late Lee Kun-hee, chairman of Samsung Electronics, had to pay 12 trillion KRW in inheritance tax. The Samsung family paid with artworks and raised money by pledging shares as collateral. Still, they lacked funds and had to sell some Samsung Electronics shares, accepting a weakening of control. The heirs of the late Kim Jung-ju, founder of Nexon, also had to pay about 6 trillion KRW in inheritance tax and paid with shares of Nexon's holding company NXC. In the Hanmi Group, inheritance tax caused management disputes among mother, daughter, and brothers.

There are also criticisms that the burden on the middle class has increased because inheritance tax reform has not been made. In the 1990s, the inheritance tax system was a tax paid only by some wealthy people. But as the economy developed and income levels and prices rose, more people began paying inheritance tax. The failure to change the taxable base for 24 years and to keep the deduction limit at 1 billion KRW for 28 years caused problems. Inheritance tax started as a tax imposed on wealthy asset owners for wealth redistribution but now the middle class has started to pay it.

According to inheritance and gift tax statistics announced by the National Tax Service on the 20th, the number of deceased subject to inheritance tax in 2023 was 19,944. This is an increase of 4,184 (26.5%) from 15,760 a year earlier. In the early 2000s, the number of people who had to pay inheritance tax was in the thousands, but it surpassed 5,000 in 2011 and exceeded 10,000 in 2020. Generally, if the inherited property exceeds 1 billion KRW, there is a high possibility of paying inheritance tax. As Seoul housing prices rose rapidly, even inheriting a single house now triggers tax liability.

The government's position is that inheritance tax rates should be lowered to eliminate these side effects. Sung Tae-yoon, policy chief at the Presidential Office, appeared on KBS's Sunday Diagnosis on the 16th and said, "The top inheritance tax rate should be lowered to the OECD average level," adding, "Since the OECD average is estimated to be around 26%, it is necessary to reduce it to around 30% first." The ruling party also supported the inheritance tax reduction theory. On the 20th, the People Power Party held a special committee on fiscal and tax reform, where Chairman Song Eon-seok pointed out, "Inheritance tax is one of the representative cases of our country's tax system that does not meet global standards."

However, lowering inheritance tax is not an easy issue. There is considerable public opposition to reducing the inheritance tax rate. First, it is argued that inheritance tax rates cannot be simply compared to the OECD average. Each country has different taxable bases and various deduction systems. In particular, South Korea applies various deductions to inheritance tax, such as a basic deduction of 200 million KRW, a child personal deduction of 50 million KRW per child, and a blanket deduction of 500 million KRW. Even if the taxable base is 100 million KRW, the actual inherited assets can be much larger. Based on this, inheritance tax reduction is criticized as a 'tax cut for the rich' policy benefiting high-net-worth individuals rather than the middle class.

Inheritance Tax → Inheritance Acquisition Tax: Differences and Pros and Cons

There is also ongoing discussion about changing the taxation method along with the tax rate. In South Korea, inheritance tax follows the 'inheritance tax' rule. Inheritance tax is a method of taxing the entire estate. For example, if after all deductions, the estate is 10 billion KRW, the tax does not change regardless of how many people divide it. Under the current tax law, the highest tax rate would likely be applied.

There is a strong voice advocating changing this to an 'inheritance acquisition tax.' The inheritance acquisition tax is levied based on the property each heir receives, not the total estate. Suppose 10 people inherit 10 billion KRW equally, each receiving 1 billion KRW. Under the inheritance tax system, tax is levied once on 10 billion KRW. Under the inheritance acquisition tax, tax is levied on each person’s 1 billion KRW. Since the taxable amount decreases, the tax rate naturally lowers. This reduces the tax burden without adjusting tax brackets or rates.

However, the inheritance acquisition tax is not without drawbacks. It requires examining the property acquired by each heir individually, which may increase tax administration costs. There is also concern about various loopholes, such as falsely splitting the estate to reduce taxes. Since the tax revenue collected by the state naturally decreases, tax revenue shortages and weakening of wealth redistribution functions are disadvantages.

Although there is much debate surrounding inheritance tax, the clear fact is that the inheritance tax system established decades ago significantly impacts our society and economy. Professor Milton Friedman added this to change the young man's mind who argued for raising inheritance tax at the time. He said that the desire to leave something to one’s family is close to human nature and should not be restricted by excessive inheritance tax.

"We are a family society, not an individual society. What truly motivates people is the incentive to establish and build their family. (Omitted) It is a truly strange phenomenon. Even though they are confident their children’s income will be much greater than their own, they tighten their belts and save to leave wealth to their children. (Omitted) A 100% inheritance tax would destroy the continuity of society."

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