Considerations before reforming the inheritance tax

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Considerations before reforming the inheritance tax

Published: 18 Mar. 2025, 00:02

Audio report: written by reporters, read by AI

Suh Kyoung-ho

The author is an editorial writer at the JoongAng Ilbo.

Announcements about tax cuts always demand close attention. When politicians propose tax reductions, especially ahead of an election, my first instinct — honed over years as an economic journalist — is to suspect populism.

Last week, the government announced a sweeping overhaul of the inheritance tax system, marking the most significant change in 75 years. The plan involves shifting from the current estate tax system, which levies taxes on the total assets left by the deceased, to an inheritance acquisition tax, where each heir is taxed individually based on their inherited share. While the estate tax is administratively convenient for tax authorities, it lacks fairness since taxation is not directly proportional to what each heir receives. The inheritance acquisition tax, on the other hand, ensures a more equitable distribution of tax burdens but requires additional administrative efforts to track individual inheritances.

Apartment complexes in Jamsil, Songpa District in southern Seoul. [YONHAP]

The push for inheritance tax reform stems from the sharp rise in property prices in the Seoul metropolitan area, which has significantly expanded the number of taxpayers subject to inheritance tax. In 2000, only 1,400 individuals were liable for inheritance tax, but by 2023, this number had surged to 20,000.

Transitioning to an inheritance acquisition tax is a step in the right direction. Tax systems should be as simple and transparent as possible. Merely increasing deductions would only complicate an already convoluted and outdated system. Compared to proposals from the opposition and other political circles that focus on expanding tax exemptions, the introduction of the inheritance acquisition tax is a far superior alternative. However, several key considerations must be addressed.

First, the reform should not lead to a significant decline in total tax revenue. The government's proposal, which includes the shift to an inheritance acquisition tax and an increase in child-related deductions, is projected to reduce annual tax revenue by approximately 2 trillion won ($1.38 billion). While correcting inequities within individual tax categories is important, it should not come at the expense of the broader fiscal balance.

From a tax collection standpoint, inheritance tax has certain advantages that cannot be overlooked. Unlike income or property taxes, inheritance tax faces relatively low resistance from taxpayers. Since inheritance is an individual event — everyone ultimately passes away alone — it is unlikely to provoke collective opposition. Moreover, unlike property taxes, inheritance tax cannot be passed on to tenants through increased rent.

Taxes influence economic behavior, often prompting individuals to relocate wealth overseas or reduce work effort to minimize their tax burden. However, inheritance tax does not have the same behavioral impact — no one can avoid death due to tax concerns. This is why some tax experts refer to it as a “bottleneck tax.”

Thus, rather than merely comparing inheritance tax rates across different countries, it is crucial to evaluate them within the broader framework of wealth taxation to ensure a balanced tax burden. Some argue that high inheritance taxes make it difficult for business owners to maintain managerial control over family enterprises. To address this issue, Korea could consider introducing a capital gains tax system, under which assets such as stocks and real estate are not taxed at the time of inheritance but instead taxed when they are eventually liquidated.

Korea must also grapple with the broader issue of inherited wealth and economic inequality. A recent article in The Economist titled “The Return of Inheritocracy” highlighted the growing concentration of wealth among heirs. This year, inherited wealth in advanced economies is expected to reach $6 trillion, equivalent to 10 percent of their combined GDP. The baby boomer generation has successfully accumulated wealth while largely avoiding the financial disruptions of war and inflation. Given that wealth inequality is even more pronounced than income inequality, the passing down of assets will only further exacerbate disparities in income and wealth distribution.

The Economist warns that inheritocracy not only undermines meritocratic ideals but also poses a fundamental threat to capitalism itself. It is particularly noteworthy that a traditionally conservative publication has consistently advocated for inheritance tax as the fairest tool to mitigate wealth concentration.

Apartment buildings seen from Mount Namsan in central Seoul on Nov. 18, 2024. [YONHAP]

In Korea, where the median apartment price in Seoul is approaching 1 billion won ($689,000), concerns about the impact of inherited wealth are becoming increasingly relevant. As of last year, the price-to-income ratio (PIR) for the bottom 20 percent of earners in Seoul stood at 88.3, meaning that a low-income household would need to save every penny of their income for 88 years to afford a high-end apartment in districts like Gangnam or Seocho.

Against this backdrop, one must consider how such individuals might react to reports that a household can inherit a 2-billion-won ($1.38 million) apartment and pass it on to a spouse and two children without paying a single won in inheritance tax. If the frustrations and despair of those unaffected by the inheritance tax are continually ignored, The Economist’s warning may prove prescient: capitalism itself could face a crisis.

Translated using generative AI and edited by Korea JoongAng Daily staff.