Time to amend the inheritance tax

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Time to amend the inheritance tax

Published: 08 Jul. 2024, 19:58

Choi Hoon
The author is the chief editor of the JoongAng Ilbo.

Inheritance tax was cited as the most unfair levy by the British who first introduced it in 1894. In a poll by the Telegraph in June 2023, 48 percent of the respondents called it the cruelest tax, even though only 3.73 percent of the British people pay the tax, while 6.82 percent of Koreans pay it. Just like Thomas Hobbes’ portrayal of a tax burden being as painful as inequality, British people are hostile to the tax imposed on heirs to assets beyond their will. The duty had been a bone of contention for centuries since its establishment.

Roman Emperor Augustus established the so-called “death tax” starting with 5 percent of the value of inheritance to fund military pension. The rate shot up for political and ideological reasons during revolutions.

The maximum inheritance tax rate, which jumped to 8 percent in Britain in 1894 after the French Revolution, soared to more than 20 percent in some European countries following the Russian Revolution in 1917. Governments pushed up the rate to mitigate the public grudge against the noble class by using the money for welfare. Between the two revolutions, Karl Marx and Friedrich Engels in the Communist Manifesto of 1848 listed “expropriation of land, a heavy progressive tax and the abolition of inheritance rights” as the top 3 of their 10 commandments. Marx called for the abolishment of familial and patriarchal elitism, as he found them a bourgeois legacy to protect and keep a private estate among wealthy families and repress women. Inheritance became the first target to remove in the Communist revolution.

Korea’s inheritance tax — which was introduced in March 1950, just three months before the Korean War — went up to 90 percent amid the tense ideological conflict in the wake of the country’s liberation from Japanese colonial rule. Taxing inheritance was the most expedient way to bolster public finance. The maximum tax rate settled at 50 percent in 1999 under President Kim Dae-jung. The first liberal administration cited the need to impose a heavy tax on the superrich to prevent their illicit gifting and command over their corporate affiliates through exotic financial means.

Much has changed since then. First of all, the perception of enterprises and their contribution to the country has greatly changed. Startups have become millionaires, and business managements are under stronger scrutiny. Still, business owners are subject to the world’s highest inheritance tax rate of 60 percent, which is higher than Japan’s 55 percent, when counting the 20 percent surcharge.

Heirs to large conglomerates are responsible for stakeholders as well as their families, not to mention hiring and investment. Since they have dutifully paid their heavy dues of corporate, income and property ownership taxes, the inheritance tax on the same properties after death can be deemed as double taxation. Heirs are made potential lawbreakers if they cannot keep up with their promised investment or protect their managerial right, as the taxes are imposed automatically six months after the death of a parent. The Ministry of Economy and Finance suddenly ascended to the unbecoming second largest shareholder in the holding company of online game developer Nexon after the family of the founder paid their inheritance dues in shares.

It would be more sensible for the government to impose the tax on the capital gains from heirs’ sales of inherited stocks or real estate properties, while allowing them to hold onto equity capital, which includes shares, bonds, real estate and patents necessary for corporate operation. Under the current system, heirs are forced to give up 75 percent of their inheritance, as an income tax is levied on half of the disposable assets left after paying the 50 percent inheritance tax. What motive is there to aggressively build a company if nearly three quarters of it could end up in government coffers?

The horrid story is not restricted to the superrich. Seoul apartment prices averaged at 1.17 billion won ($846,293) as of May. Half of the apartment owners in Seoul are subject to the inheritance tax levied on people with a home worth over 1 billion won. Last year’s number of 19,944 increased by 26.5 percent from the prior year and is 11.6 times greater than 20 years ago. At this rate, 80 percent of the apartments in Seoul would be subject to the inheritance tax by 2030.

Many European countries like Sweden, Canada and France have abolished, eased or are phasing out of inheritance tax so as not to scare away companies and capital. We need an entirely different approach to the inheritance tax by regarding it as a means to build wealth for the sustainability of tax revenue, hiring and investment, instead of sticking to an outdated ideological mindset.