[Viewpoint]Modernizing taxationWhen unreasonable political logic exploits national sentiment, errant tax systems prevail. One such example is the inheritance tax implemented during the Kim Dae-jung and Roh Moo-hyun administrations. In the case of Korea, critics point out that wealth accumulated during the country’s rapid economic development lacks legitimacy and transparency. It is widely presumed in Korean society that wealth is accumulated either through speculative investment in real estate or shady relationships with politicians.
Taking advantage of this widespread sentiment, the Kim Dae-jung and Roh Moo-hyun administrations went against the global trend and raised the inheritance and gift tax rates and introduced a negative tax system.
The justification was to promote equal economic opportunities by preventing conglomerate owners from using loopholes in the gift and inheritance tax laws to concentrate wealth. However, countries with market economies are increasingly abolishing inheritance taxes because realizing equal economic opportunities through high inheritance taxes is considered nearly impossible.
Moreover, when unreasonable and excessively burdensome inheritance taxes continue to be imposed for a long time in conjunction with the liberalization of capital movement, national wealth leaves the country. Such a liberalization policy takes into account that the wealthy class can become citizens of countries with no or low inheritance taxes.
Lately, the government is said to be reviewing a measure that would relax the inheritance tax. Although it is quite late, the change of position is fortunate.
However, it is not enough to lower the inheritance tax rate to the pre-financial crisis level. The government needs to abolish the inheritance tax altogether and prepare a phased program to shift to a capital gains tax.
Korea does not yet have sufficient taxation-related infrastructures to impose a capital gains tax, so sudden abolition of the inheritance tax system cannot be a realistic alternative. Therefore, the government needs to propose a road map to gradually lower the inheritance tax and completely switch to a capital gains tax in five to 10 years while simultaneously working to establish the tax infrastructure to review the transparency of economic transactions.
While the inheritance tax should be phased out over time, unreasonable inheritance and gift tax systems should be improved immediately. First of all, the estate tax should be changed to an acquisition tax. Estate taxes apply the same tax rate regardless of the amount of inherited wealth and go against the ability-to-pay principle.
In contrast, under the acquisition tax, when you distribute your wealth to more people, the heirs will have smaller tax burdens. This system encourages the distribution of wealth, which is the basic idea behind the inheritance tax.
The negative system should also be changed to a positive system. Under the negative system, the taxing agency can make a range of judgments at its discretion, so economic entities cannot predict the tax in advance. When taxation laws are ambiguous and can be interpreted arbitrarily and the tax is unpredictable, this discourages economic activity.
Finally, we should abolish gift tax regulations, which are unheard of in other countries.
Notable examples are taxes on development gains after gift taxes have been imposed and taxation on gains from stocks that were not listed at the time they were inherited but go public later.
When you inherit land or unlisted stocks and their values increase within five years, you will again be burdened gift taxes.
Even other countries with negative taxation systems do not have such clauses. Again, the inheritance tax is being used when a capital gains tax would be more appropriate.
Such a system only discourages efforts to improve the value of land and companies through development and investment.
Because we have overly emphasized wealth accumulation that lacks legitimacy and transparency, we might be overwhelmed by a desire to create an economically equal society by preventing the concentration and inheritance of wealth through inheritance and gift taxes.
Pragmatism begins when we have a taxation system suitable for a globalized economy and prepare a tax base that puts us on a level with the world.
*The writer is a senior research fellow at the Korea Economic Research Institute. Translation by the JoongAng Daily staff.
by Cho Gyeong-lyeob