Introduction to South Korea’s Inheritance Tax
Inheritance tax in South Korea is among the highest in the world, with a top rate of 50%. When combined with the surcharge for large shareholders, the effective tax rate can reach up to 60%, the highest among OECD countries. This has sparked significant debate regarding its impact on economic growth and business continuity.
Economic Implications of High Inheritance Taxes
High inheritance taxes are argued to stifle economic dynamism by reducing the capital available for reinvestment and innovation. Studies have shown that for every 1 trillion won increase in inheritance tax revenue, the economic growth rate decreases by 0.63 percentage points. Over the years, while domestic investments have stagnated, inheritance and gift tax revenues have surged from 1.5 trillion won in 1997 to 14.6 trillion won in 2022.
Comparison with OECD Countries
The average inheritance tax rate among OECD countries is around 15%, significantly lower than South Korea’s rate. This discrepancy places South Korean businesses at a competitive disadvantage, particularly in an era where global competition is fierce and capital mobility is high.
Aging Business Leaders and Economic Stability
A notable concern is the aging population of business leaders in South Korea. With 79.5% of large conglomerate leaders and 33.5% of manufacturing SME leaders over the age of 60, the impending generational shift could significantly impact the economy. Effective and less burdensome inheritance tax policies are essential to ensure a smooth transition and continuity in business operations.
Encouraging Innovation and Growth
Lowering the inheritance tax rate can have a positive ripple effect on the economy. According to research, reducing the inheritance tax rate for innovative industries like manufacturing and information technology could increase the country’s GDP by 6 trillion won and create 30,000 new jobs.
Enhancing Philanthropic Contributions
The current tax system also discourages corporate philanthropic activities. For companies within large business groups, the inheritance tax exemption limit for shares donated to public interest corporations is capped at 5%, with additional restrictions on voting rights. By contrast, many countries fully exempt such donations from inheritance tax, fostering greater corporate social responsibility and community support.
Proposed Reforms for Sustainable Growth
To address these issues, several reforms have been proposed, including:
- Reducing the inheritance tax rate to the OECD average of 15%.
- Transitioning from the current estate tax system to an inheritance tax system.
- Eliminating the surcharge for large shareholders.Removing the cap on tax-exempt donations to public interest corporations, reinstating pre-1990 policies.
- Increasing the tax exemption limits for shares with voting rights from 10% to 20%, and for non-voting shares from 20% to 35%.
Conclusion
Reforming South Korea’s inheritance tax system is not just a matter of economic policy but a necessity for maintaining economic vitality and ensuring sustainable growth. By aligning with global standards and encouraging investment, innovation, and corporate responsibility, South Korea can secure a more prosperous future for its businesses and economy.
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