Legislative Debate on Easing the Inheritance Tax and Follow-up Tasks

1. Introduction: The Emergence of the Inheritance Tax Easing Issue Between the Government and the Ruling Party

Recently, Acting President and Deputy Prime Minister and Minister of Economy and Finance Sangmok Choi stated on Tuesday, March 4, that he would push again for tax reform to convert the inheritance tax into an inheritance acquisition tax system, causing the issue of inheritance tax relief to gain rapid momentum.

In response, on Thursday, March 6, Kweonyeongse People Power Party Emergency Response Committee Chairman stated that lowering the top inheritance tax rate from the current 50% to 40% is a public demand, and presented the positions of 1) fully abolishing the spousal inheritance tax and 2) switching to an inheritance acquisition tax system. Lee Jae-myung, leader of the Democratic Party of Korea, had argued for easing the inheritance tax burden on the middle class based on Representative Kwanghyeon Lim’s proposed amendment to the Inheritance Tax and Gift Tax Act (Bill No. 3099), including raising the lump-sum inheritance deduction to 800 million won and the spousal deduction to 1 billion won. Then, on Friday, March 7, he declared his agreement with abolishing the spousal inheritance tax, significantly increasing the likelihood of passage for an amendment to the Inheritance Tax and Gift Tax Act centered on inheritance tax relief.

In other words, both ruling and opposition parties are forming a consensus on legislation aimed at reasonably easing the tax burden on the middle class. This issue report seeks to review legislative discussions between the two parties on inheritance tax relief, diagnose the problems with the current Inheritance Tax Act, and explore follow-up tasks.

2. Problems and Diagnosis of the Current Inheritance Tax Act

◩ Problems with the Current Estate Tax-Type Inheritance Tax (Double Taxation and Violation of Equity) and the Need for Reform to an Inheritance Acquisition Tax System

Inheritance tax refers to a tax imposed on the recipient of property transferred without consideration upon the death of a natural person, with that property serving as the taxable object (Lee Sejin et al., 2021). The original purpose of the inheritance tax lies in social policy goals such as redistribution of wealth and the supplementation and strengthening of the income tax function. Under the current inheritance tax, the taxable value is calculated based on all inherited property received by heirs, various deductions prescribed by law (basic, personal, and property deductions) are then subtracted to determine the tax base, and a five-bracket progressive tax rate is applied to calculate the tax amount. In this way, Korea operates a typical estate tax-type inheritance tax system with the nature of a property tax. Over the past 10 years (2014–2023), the number of inheritance tax taxpayers/assessed tax amount steadily increased from 7,542 persons/1.7453 trillion won in 2014 to 19,944 persons/12.2901 trillion won in 2023. The number of taxpayers rose by about 2.6 times, while the tax amount increased by 7.5 times.

While the current estate tax-type inheritance tax has the advantage of making tax administration and revenue collection easier, it continues to raise concerns over double taxation from the decedent’s perspective and tax equity from the heir’s perspective (Kwon Seong-o, 2022). Because inheritance tax is imposed again on assets formed from after-tax income, the problem of double taxation arises. In addition, suppose there are two households, A and B. Since the tax base and rate are determined by the total amount of inherited property, if household A has total inherited assets of 2 billion won distributed equally between two children at 1 billion won each, while household B passes on a total of 1 billion won to one child, the children in household A pay more tax than the child in household B even though each receives the same 1 billion won. This violates tax equity.

By contrast, the inheritance acquisition tax method taxes each individual based on the property actually acquired after inheritance, giving it the advantage of better aligning with the ability-to-pay principle and tax equity (Kwon Seong-o, 2022). Among the 22 OECD countries that impose inheritance tax, 17 countries—excluding five such as Korea and the United States—have adopted this acquisition-based taxation method (Lee Sejin et al., 2023).

◩ An Excessively High Inheritance Tax Rate That Does Not Match Global Standards: 3.3 Times the OECD Average of 15% (50%)

The current five-bracket progressive tax system with a top inheritance tax rate of 50% also does not align with global standards. Korea’s top inheritance tax rate of 50% is by far one of the highest among OECD countries and is strongly punitive in nature. Major advanced economies around the world have already cut and maintained their top inheritance tax rates 13 to 25 years ago—for example, the United States from 55% to 40% (2000–2012), Germany from 35% to 30% (2000), and Italy from 27% to 4% (2000). Going further, around 11 countries, including Canada (1972), Australia (1979), Sweden (2005), Austria (2008), and Norway (2014), have abolished inheritance tax altogether. Accordingly, while the OECD average top inheritance tax rate is about 15%, Korea has moved in precisely the opposite direction of the global standard by raising rates twice: from 40% to 45% on estates exceeding 5 billion won in 1997–1999, and from 45% to 50% on estates exceeding 3 billion won in 2000.

◩ Problems with the Spousal Inheritance Tax and the Need for Its Full Abolition

The current imposition of inheritance tax on spouses includes a 500 million won deduction, but it is problematic from the following two perspectives. First, inheritance between spouses is not an intergenerational transfer of wealth, so taxing it does not accord with the current inheritance tax principle of taxation for the purpose of intergenerational wealth redistribution. For this reason, most advanced countries, including the United States, the United Kingdom, and France, tax inheritance by children but do not tax inheritance between spouses. Second, given that women’s participation in society has long since become established and in light of economic and social changes, not only the housing stability and livelihood of the surviving spouse but also the spouse’s contribution to building marital property should be broadly recognized. Taxing jointly built property is therefore inappropriate, and the spousal inheritance tax should be fully abolished. Fortunately, Lee Jae-myung has expressed agreement with abolishing the spousal inheritance tax, making realization more likely.

◩ In Practice, the Redistribution Effect Is Minimal

Although the legislative purpose of the current inheritance tax system is wealth redistribution, the main argument is that its actual effect is either limited or worsening. An analysis of changes in the wealth Gini coefficient from 2000 to recent years (2022) among the five OECD countries with the highest inheritance tax rates found that the effect was negligible in Korea and the United Kingdom, and actually worsened in the United States, France, and Japan (Global Wealth Report, 2003). Meanwhile, the Korea Institute of Public Finance (2016) found that when wealth is transferred across generations through inheritance or gifts for altruistic motives such as improving the economic conditions and quality of life of the children’s generation, a reduction in the effective inheritance and gift tax rate improved asset inequality as measured by the Gini coefficient. In other words, lowering the inheritance tax may actually enhance the wealth redistribution effect.

3. Follow-up Tasks: Legislative Tasks for Easing the Inheritance Tax

At a time when discussions between the government and the ruling party on easing the inheritance tax are gaining rapid momentum, the golden hour for reaching bipartisan agreement on the legislative direction and advancing reform of the Inheritance Tax Act must not be missed. Future amendments to the Inheritance Tax Act must include 1) a cut in the top tax rate (50%→30%), 2) a shift to inheritance acquisition taxation and a relaxation of the progressive rate structure by stages, and 3) abolition of the spousal inheritance tax. In the medium to long term, the top inheritance tax rate should be reduced at least to the OECD average level of 15%, and ultimately toward abolition. In addition, discussion of easing the requirements for the family business inheritance deduction, as well as issues related to premiums and discounts on inherited shares, which have long been raised, should continue and be legislated as well (Lee Sejin et al., 2023).

◩ References

∙ National Tax Service (2024), 2023 Annual National Tax Statistics Yearbook.

∙ Kwon Seong-o (2022), Measures to Improve the Inheritance and Gift Tax System, Korea Institute of Public Finance public hearing materials on reform of the inheritance and gift tax system.

∙ People Power Party, Main Contents of the Emergency Response Committee Meeting [Press Release], 2025.03.06.

∙ Korea Chamber of Commerce and Industry (KCCI) (May 2024), Problems with the Inheritance Tax System and Measures for Improvement.

∙ Bill No. 3099, Partial Amendment to the Inheritance Tax and Gift Tax Act (proposed by Representative Kwanghyeon Lim). 2024.8.22.

∙ Lee Sejin (2023), Current Status and Tasks of Discussions on Adjusting the Inheritance Tax Deduction Limit, Issues and Points No. 2114.

∙ Korea Institute of Public Finance (2022), Reform Plan for the Inheritance and Gift Tax System, Tax and Fiscal Brief No. 137.

Wiki:

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Original title: 상속세 완화 입법 논의와 후속 과제

Author: Center for Free Enterprise (CFE)

Date: 2025-03-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=issue&pn=2&idx=27394