Rethink the inheritance tax

The Korean government is considering rewriting the Civil Act to reserve half of the statutory inheritance to the surviving spouse in order to better accommodate our rapidly aging society. But the inheritance law should be addressed from a more macro perspective. Any changes to the inheritance system must accompany a revision in taxation.

Korea levies a tax of 10 percent to 50 percent on inheritance, according to the size of the estate. Inheritance tax rates surged to 50 percent in 2000 from 45 percent in 1997-99 and 40 percent prior to 1996. The maximum rate is nearly double the average of 26 percent for OECD member countries, which are among the wealthiest in the world. The government has been criticized for taxing income during a citizen’s lifetime as well as after death. The heavy taxation has led to overspending and capital flight by the wealthy. Canada and Australia abolished inheritance taxes in the 1970s followed by Italy, Portugal, Sweden, Hong Kong, Singapore and New Zealand since 2000.

The problem with our inheritance tax system is that a beneficiary must pay tax for the same estate on which his or her surviving parent was taxed. The local inheritance tax is, in fact, a triple taxation, violating the principle of one levy per generation. It is unfair that the surviving spouse is taxed on the estate he or she helped to build during the couple’s lifetime just because the estate was in the name of another. The United States revised its law in 1981 to exempt the surviving spouse. Britain also does not levy a tax on the transfer of assets between legal couples.

We traditionally placed a heavy tax on inheritance because of the perception that the lion’s share of an estate was the result of earned income. But the current death levy is a heavy burden on the economy. Business owners must stake their management rights because they are forced to sell their stake in order to pay an astronomical inheritance tax. Owners of midsize corporations complain they have to sell their factories in order to succeed in their family businesses. The excessive inheritance levy reduces investment and hiring, and encourages unfair or irregular business practices by family-owned conglomerates. The National Assembly last month expanded the scope of exemptions from corporate inheritance taxes, but the legislature must be more aggressive.

In line with the Civil Act change on inheritance, the overall inheritance system, including taxes, must change. If the purpose of legal change is to help single senior citizens, taxation also must be eased.