"If Inheritance Tax Revenue Decreases by 10%, GDP per Capita Increases by 0.6% and Market Capitalization by 6.4%"

Hankyung Association 'Empirical Analysis of Inheritance Tax Economic Effects' Report
"13% Annual Average Increase Over 24 Years... Major Impact on National Economy if Reformed"
"Inheritance Tax System's Income Redistribution Effect Unclear"

It has been claimed that if inheritance tax revenue decreases by 10%, the gross domestic product (GDP) per capita would increase by 0.6%, and the stock market capitalization would grow by 6.4%. Research results also showed that collecting a large amount of inheritance tax does not significantly enhance income redistribution effects. In other words, easing inheritance tax does not necessarily worsen income inequality. Considering that the average annual growth rate of inheritance tax revenue was 12.7% over the 24 years since the last revision of the inheritance tax system in 2000, it is analyzed that the positive impact on the national economy would be very significant if the tax is eased.

On the 24th, the Korea Economic Association (KEA) stated in a commissioned research report titled "Empirical Analysis of the Economic Effects of Inheritance Tax" that easing inheritance tax would contribute to long-term increases in national income and enhancement of corporate value. The report was prepared by Professor Jin Yeop Ji of the Department of Economics at Dongguk University, commissioned by KEA. The report explained that the term "long-term" means that even if inheritance tax revenue (independent variable) does not have an immediate effect on GDP per capita or market capitalization (dependent variables), its influence gradually appears and persists over time.

The report estimated the effects of changes in inheritance tax revenue on GDP per capita and market capitalization using panel data from 38 OECD member countries spanning 1965 to 2022 (58 years). The estimation showed that a 1% decrease in inheritance tax revenue could lead to a long-term increase of 0.06% in GDP per capita. A 10% decrease was estimated to increase GDP per capita by 0.57%. Especially considering that Korea’s inheritance tax system (tax rates and taxable base brackets) was last revised in 2000 and that the average annual growth rate of inheritance tax revenue over the past 24 years reached 12.7%, reducing inheritance tax revenue could significantly impact the increase in Korea’s GDP per capita. KEA stated, "High inheritance tax hinders the efficient transfer of wealth, affecting decision-making by citizens and businesses (economic agents) and inevitably leading to reduced consumption and investment."

Using the same method to analyze the effect of changes in inheritance tax revenue on market capitalization, it was estimated that a 1% decrease in inheritance tax revenue would lead to a long-term increase of 0.654% in stock market capitalization. A 10% decrease was estimated to increase market capitalization by 6.43%. KEA noted, "High inheritance tax can increase uncertainty in the corporate succession process, negatively affecting corporate value."

There was also a finding that inheritance tax does not have a significant impact on national income inequality (Gini coefficient). A comparative analysis between countries that abolished inheritance tax and those that did not showed that the effect of abolishing inheritance tax on the Gini coefficient was about -0.02 percentage points. A higher Gini coefficient indicates greater inequality.

KEA emphasized the importance of noting that the estimated effect was negative. KEA explained, "The fact that the effect of abolishing (or easing) inheritance tax appeared as a negative value means that the income redistribution effect of inheritance tax collection is unclear," adding, "In other words, it can be interpreted that easing inheritance tax does not worsen income inequality."

KEA advocated for lowering the inheritance tax rate. It also called for the abolition of the 20% premium valuation system on shares held by major shareholders. The highest inheritance tax rate on direct descendants is 50%, and with the premium valuation applied, the effective tax rate reaches 60%, which is the highest among OECD countries.

Furthermore, KEA suggested reforming the inheritance tax system into an estate tax or inheritance acquisition tax. The estate tax is levied on the total inherited estate of the decedent, while the inheritance acquisition tax is based on the actual property received by the heir. This system reflects the heir’s received assets and taxpaying capacity more accurately, differing from the current inheritance tax system that fixes the effective tax rate at 60% for major shareholders.

There was also a proposal to reform the tax system into a capital gains tax. Capital gains tax treats inherited property as capital gains and taxes only the profit realized during the disposal of the property. Countries such as Sweden, Australia, Canada, and New Zealand have introduced and implemented this system. Professor Jin Yeop Ji, who authored the report, stated, "For the inheritance tax system to be valid, it must provide evidence that income collected through inheritance tax from individuals and businesses is efficiently reinvested in the economy or that inheritance tax alleviates income inequality. If this is not possible, it is necessary to consider transitioning to a capital gains tax system, as major advanced countries have done."

Lee Sang-ho, head of the Economic and Industrial Headquarters at KEA, emphasized, "Empirical results showing that easing the inheritance tax burden can positively affect the economy and stock market support the necessity of reforming the inheritance tax system," adding, "We must reform the outdated inheritance tax system to reduce uncertainty in corporate management and revitalize the economy and stock market."