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Strike a balance between tax cuts and revenue

Published: 28 Jul. 2024, 19:59

The keystone of revisions in the tax code for next year is the first revisit to the country’s notoriously high inheritance tax for the first time in 24 years while deferring fixes in the comprehensive real estate tax. The government is proposing to lower the maximum inheritance tax rate from 50 percent to 40 percent plus the elimination of the 20-percent surcharge on the largest shareholder.

The threshold for tax waivers for inheritances will be yanked up to 500 million ($360,880) from 50 million won per person. Our inheritance tax system needs a makeover, as prices have doubled since 1997 and home values appreciated 2.2 times across the nation and 2.8 times in the capital region for the past 27 years.

The threshold for inheritance tax exemptions for heirs in family-run companies will also be lifted to 120 billion won from 60 billion to ensure the sustainability of listed companies. The tax credit goes to companies generating annual sales of less than 500 billion won when their owners hand them down after running for more than 10 years. The changes in the comprehensive real estate tax have been suspended in light of the recent volatility in housing prices.

The changes in the tax code are expected to shave tax revenue by 4.35 trillion won annually. The government says the benefit from the inheritance tax cut will largely go to the middle and working class. But the government must persuade the majority opposition party which disapproves any tax cut for the rich. The heirs subject to the inheritance tax make up only 5 percent of the population.

The government also must find solutions to the tax reduction. Tax revenue last year fell short by a record 56 trillion won due to the slump in the chip industry. The fiscal deficit is expected to widen due to an additional shortfall this year. The deferment in easing the comprehensive real estate tax and the extension of the transportation, energy and environment taxes for another three years also aim to sustain the tax base.

The tax credit for the bottom 40-percent income bracket is also pointless as they are not subject to the income tax to begin with. For the low-income group, fiscal spending can be more effective than offering tax credits.

More importantly, the government needs to provide a long-term vision to bolster its fiscal base so that it can brace for the rising welfare cost from the fast aging population and low birthrates. Nevertheless, the government merely proposes smaller deductions in credit-card VAT claims to help increase its tax revenue. The government must come up with more workable and sustainable fiscal visions while upholding conservative government spending and tax scheme.