[Insight & Opinion] Tax Structure Reform: Shifting from Inheritance Tax to Holding Tax

The structure of property taxation in South Korea is markedly misaligned with international standards. While property holding taxes are lower than the OECD average, the inheritance tax rate is among the highest in the world. Under the current Inheritance and Gift Tax Act, the top tax rate is set at 50%, and with the application of a large shareholder premium, the effective rate can exceed 60%. In contrast, the effective property holding tax rate is about 0.8% of GDP, which is only half the OECD average of approximately 1.8%. The overall tax structure relies excessively on inheritance tax, and even this is not effectively enforced.

In practice, the burden of inheritance tax is unequally distributed across different social classes. Tax-saving strategies such as establishing corporations in children's names, transferring commercial buildings or stock shares in advance, and spreading out lifetime gifts to lower the taxable base are widely utilized. As a result, wealthy individuals who are adept at using these loopholes can reduce their tax burden, while the middle class, lacking such means, ends up bearing the brunt of high tax rates-a clear paradox.

The proliferation of small commercial spaces such as upscale cafes in Gangnam District is a telling indicator of the consequences of this unfair tax structure. This is not simply about revitalizing commercial districts; rather, it is a widespread strategy to convert real estate into business entities to lower taxable value. This is a classic example of "rational tax saving" created by the intersection of high inheritance taxes and low property holding taxes.

In contrast, advanced economies such as the United Kingdom and the United States design their tax systems around property holding taxes and capital gains taxes rather than inheritance taxes. The inheritance tax rate in the United Kingdom is about 40%, but property holding taxes and capital gains taxes provide a stable tax base. In the United States, inheritance tax is imposed only on a tiny fraction of the wealthiest, while local governments' property taxes serve as the main source of revenue. The key is not simply having high nominal tax rates, but rather designing the system to ensure effective tax collection and minimize opportunities for avoidance.

It is now imperative for South Korea to shift its tax structure in this direction. A practical approach would be to amend the Local Tax Act and the Comprehensive Real Estate Holding Tax Act to gradually raise the effective property holding tax rate to the OECD average. For example, a scenario could be set to increase the rate by 0.2 percentage points annually over the next five years, from 0.8% to 1.8%. In this case, property tax revenue is estimated to increase from about 30 trillion won to 55 trillion won. By applying differentiated increases based on the size of property holdings, it is possible to minimize the burden on the middle class while increasing the real burden on high-net-worth individuals.

In parallel, the inheritance tax rate should be adjusted from the current 50% to between 30% and 40%, while further strengthening mechanisms to block tax avoidance. For instance, the requirements for the "family business succession special provision" should be redesigned more strictly, and the period for aggregating lifetime gifts should be extended from the current 10 years to 20 years to reduce de facto inheritance through gifts. Additionally, when assessing inheritance tax, the actual value of assets converted into business entities should be reflected, thereby closing loopholes such as the current use of cafes and commercial properties for tax saving. Tax fairness is not achieved through political rhetoric about equality, but through sophisticated institutional design and strategic approaches.

The core issue is not the level of tax rates, but the balance of the tax base. Maintaining only a high inheritance tax while leaving avoidance methods unchecked undermines both tax justice and efficiency. On the other hand, restructuring the system around property holding taxes imposes a rational tax burden on asset ownership itself and can substantially improve tax equity. To alleviate wealth inequality and reduce the intergenerational transfer of wealth, it is more important to have a precisely designed tax system that considers the combined effects of all tax categories, rather than focusing solely on the nominal rates of individual taxes.

The concentration of cafes in Gangnam is not just a trend but a market signal created by a distorted tax structure. If policymakers truly wish to curb the intergenerational transfer of wealth, the most effective approach would be a comprehensive tax reform that combines effective property holding taxes with robust anti-avoidance measures, rather than simply imposing high inheritance tax rates.

Kim Kyuil, Professor at Michigan State University