Inheritance Tax Reform Should Ease the Burden on Young People

Young people are pointing out that excessive inheritance taxes have tied their hands and feet. When they see Samsung Electronics Chairman Lee Jae-yong paying KRW 12 trillion in inheritance tax, they do not regard it as wealth redistribution. In one voice, they say it is excessive. The inheritance tax, once simply a tax levied on transferred assets, has degenerated into a “binding tax” that shackles not only the wealthy but also the middle class, ordinary citizens, and young people. They also understand that the burden of inheritance tax shows up in reduced job creation and new investment.

Inheritance tax is one of the biggest reasons behind the hiring difficulties that drive young people into despair. There has been a growing number of cases in which small and medium-sized enterprises and mid-sized companies give up business succession because of inheritance tax burdens. Because the tax is so high, founders are placed in a situation where they first look for ways to avoid taxes rather than focusing on passing down technology and know-how for succession. This is also why it is difficult to find enduring companies in Korea that have lasted 50 or 100 years or more. As companies grow larger, the inheritance tax burden eventually forces them to scale back hiring and investment, which in turn leads to broader social problems such as youth unemployment.

It is not just employment. Even owning a single apartment can mean worrying about inheritance tax. Recently, the Korea Enterprises Federation released an analysis showing that in six years, 80% of apartment-owning households in Seoul will be subject to inheritance tax. A tax that once served as a tool for taxing the vaults of the wealthy has remained stuck at the tax base set 24 years ago, tightening its grip even on ordinary families living normal lives. As the economy has grown and prices have risen, adjusting the tax base brackets has become unavoidable. Yet because the taxable base amounts have not been changed since their introduction, a gap has emerged between the system and reality.

Tips for reducing inheritance tax have become a hot topic among young people struggling with housing problems. When parents die, if their children have no other assets, they may have no choice but to sell the apartment inherited from their parents in order to pay the enormous tax bill. In a climate where ownership of real estate determines one’s asset standing, people have begun calculating how to avoid inheritance tax as much as possible.

Among the most widely used methods is purchasing an apartment in an outlying area before inheritance and then exchanging it with the parents’ home in the Seoul metropolitan area. This method helps maximize the tax-exempt range and reduce the tax incurred in inheriting the parents’ real estate. The reality is that inheritance tax, nominally intended to prevent tax evasion, is instead pushing parents and children to put their heads together and discuss tax-saving strategies.

Korea’s inheritance tax burden is among the highest in the OECD. Considering the top tax rate of 50% and up to a 20% premium for largest shareholders, it is fair to call it grotesque. In Sweden, a pharmaceutical company was passed on to the founder’s children after his death, but they ultimately sold the company because of a 70% tax rate. They gave up succession because of the burden of paying inheritance tax. Sweden then abolished inheritance tax entirely in 2005. Even the United Kingdom, the original home of the inheritance tax, is moving to abolish a tax it has maintained for more than 200 years. This is because a social consensus has formed that inheritance tax now produces greater side effects in constraining economic activity than benefits in fulfilling its original purpose.

Inheritance tax must be changed to reflect reality. For young people, it has become one of the many barriers contributing to difficulties in finding jobs and housing. If we are to ease the burden on the younger generation, now is the time to seriously discuss reform. The grotesquely high inheritance tax rates should be lowered, and the taxable base amounts should be raised in line with the size of the economy. It is also time to rationally simplify the relevant tax requirements to ensure stable business succession. That is why inheritance tax reform must be urgently discussed so that young people and businesses can grow together and thereby enhance national competitiveness.

Hea-lim Park, Senior Research Fellow, Center for Free Enterprise (CFE)

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Original title: 상속세 개편으로 청년 부담 덜어 줘야

Author: Hea-lim Park

Date: 2024-03-26

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=26536