[Op-Ed] Inheritance Tax Should Shift to an Inheritance Acquisitions Tax Based on What Each Heir Receives

The current inheritance tax system imposes tax on the total value of the estate left by the deceased. This is an estate tax model. The same marginal tax rate is applied to all heirs regardless of the size of the inheritance each one receives. Even if there are multiple heirs, the total inheritance tax amount remains the same. The total inheritance tax calculated in this way must then be paid by each heir in proportion to the share of the estate he or she inherited. For this reason, heirs have long complained that the estate tax system is unfair.

After Samsung Group Chairman Lee Kunhee passed away, it became known that more than KRW 12 trillion in inheritance tax—over half of the total inherited estate—had been imposed, and calls for reform of the system grew louder. In particular, public opinion spread in favor of shifting the inheritance tax system from an estate tax model to an inheritance acquisition tax model. The Ministry of Economy and Finance is pursuing such a transition through its “Study on Legislative Measures to Introduce an Inheritance Tax Acquisition-Based Taxation System.”

The inheritance acquisition tax model calculates inheritance tax based on the assets each heir actually acquires. Under this approach, heirs face a relatively lighter tax burden.

Suppose a deceased person leaves a total of KRW 3 billion equally to three children, with KRW 1 billion going to each. Under the estate tax model, the tax is first determined on the full KRW 3 billion, after which the inheritance tax is imposed equally on the three heirs. Under the inheritance acquisition tax model, tax is assessed separately on the KRW 1 billion inherited by each of the three heirs.

The inheritance acquisition tax model has several advantages.

First, it is consistent with the ability-to-pay principle. The ability-to-pay principle means taxation according to a taxpayer’s capacity to bear the burden. Under the inheritance acquisition tax model, inheritance tax is determined according to the amount of inherited assets each heir acquires. Because it takes into account each heir’s tax-paying capacity, it is better aligned with fairness.

Second, it fits the coherence of the tax system. Coherence in the tax system means implementing the tax regime in a logical and mutually consistent manner. Inheritance tax is currently imposed under an estate tax model, while gift tax is imposed based on acquisition. Since inheritance tax and gift tax are similar forms of taxation, both should be aligned under an acquisition-based model to ensure consistency in tax law.

Third, it would help address the “Korea discount,” the undervaluation of shares in listed Korean companies. Controlling shareholders would no longer try to avoid stock price increases in order to reduce the taxes they must pay when passing on their holdings. This would not only invigorate corporate activity but also help attract foreign investment into Korea.

Finally, considering international global standards, the inheritance acquisition tax is more appropriate than the estate tax. Of the 24 OECD member countries that operate an inheritance tax system, 20 use the inheritance acquisition tax model. Only four countries—Korea, the United States, the United Kingdom, and Denmark—do not adopt this approach.

Even now, the system should be converted to an inheritance acquisition tax model so that it becomes a fairer method of taxation. If the system is changed to an inheritance acquisition tax, citizens will pay taxes in line with tax justice and equality, based on the amount they actually inherit. Tax law will gain logical consistency. As a result, the vitality and dynamism of our society will increase, and the national economy will develop further.

Jaehoon Jeong, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 상속세, 받는 만큼 내는 '유산취득세'로 바뀌어야 한다

Author: Jae-hoon Jeong

Date: 2024-09-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26858