Legislative Discussion on Easing Inheritance Tax and Follow-up Tasks

1. Introduction: Growing Momentum Behind Inheritance Tax Relief

Discussion surrounding inheritance tax relief has recently accelerated after Choi Sang-mok, Acting President and Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, announced on Tuesday, March 4, that the government would again pursue tax reform by introducing an inheritance acquisition-based taxation system.

Following this announcement, on Thursday, March 6, Kwon Young-se, interim leader of the People Power Party, stated that reducing the top inheritance tax rate from the current 50% to 40% reflects widespread public sentiment. He outlined two key policy directions:
first, the complete elimination of inheritance tax imposed on surviving spouses; and
second, a transition from the existing estate-based tax to an acquisition-based inheritance tax system.

Meanwhile, Democratic Party leader Lee Jae-myung had previously supported easing inheritance tax burdens on middle-income households by raising the general deduction by KRW 800 million and increasing the spouse deduction by KRW 1 billion, citing an amendment bill proposed by Rep. Im Gwang-hyeon (Bill No. 3099). However, on Friday, March 7, Lee publicly expressed support for abolishing spouse inheritance tax altogether. This statement significantly increased the likelihood that an amendment focused on inheritance tax relief could advance in the National Assembly.

In short, both ruling and opposition parties now appear to share common ground on the necessity of easing excessive inheritance tax burdens on the middle class. Against this backdrop, this report examines current legislative discussions, identifies structural shortcomings in the existing inheritance tax system, and outlines key policy considerations going forward.

2. Key Issues in the Current Inheritance Tax System
◩ Structural Problems of the Estate-Based Tax Model and the Case for an Acquisition-Based System

Inheritance tax is imposed on assets transferred without compensation upon an individual’s death (Lee Se-jin et al., 2021). Historically, the tax has been justified on social-policy grounds, particularly as a tool to moderate wealth concentration and supplement income taxation.

Under Korea’s current approach, the taxable base is calculated by aggregating the entire estate inherited by all heirs. Statutory deductions—such as basic, personal, and asset-specific deductions—are then applied, after which a five-tier progressive tax schedule determines the final tax liability. This structure reflects a classic estate-based model that taxes the total value of inherited wealth as a form of asset taxation.

Over the past decade (2014–2023), both the number of taxpayers and the total inheritance tax assessed have increased sharply. The number of taxpayers rose from 7,542 in 2014 to 19,944 in 2023, while assessed tax revenue expanded from KRW 1.745 trillion to KRW 12.29 trillion—an increase of roughly 2.6 times and 7.5 times, respectively.

Although this model offers administrative convenience and stable revenue collection, it has long faced criticism. From the perspective of the deceased, assets accumulated from already-taxed income are subject to taxation once again, raising concerns of repeated taxation. From the heirs’ perspective, the system often produces uneven outcomes. For example, if one household leaves KRW 2 billion to two children (KRW 1 billion each) while another leaves KRW 1 billion to a single child, heirs receiving the same amount may face different tax burdens simply because total estate values differ. Such outcomes undermine perceptions of fairness.

By contrast, an acquisition-based inheritance tax assesses each heir individually according to the value actually received. This method better reflects individual tax-paying capacity and is more consistent with equitable taxation principles (Kwon Seong-oh, 2022). Of the 22 OECD countries that levy inheritance taxes, 17 employ acquisition-based systems, while only five—including Korea and the United States—retain estate-based models (Lee Se-jin et al., 2023).

◩ International Comparison: Exceptionally High Tax Rates in Korea

Korea’s inheritance tax rates are also notable in an international context. The top marginal rate of 50% is among the highest in the OECD and exceeds prevailing norms in most advanced economies.

Many countries reduced inheritance tax rates decades ago. The United States lowered its top rate from 55% to 40% between 2000 and 2012; Germany reduced its rate from 35% to 30% in 2000; and Italy cut its rate from 27% to 4% in the same period. Furthermore, approximately 11 countries—including Canada, Australia, Sweden, Austria, and Norway—have abolished inheritance tax entirely.

As a result, the average top inheritance tax rate across the OECD is estimated at around 15%. Korea, however, moved in the opposite direction by raising rates twice in the late 1990s and early 2000s, placing it well above international norms.

◩ Issues Surrounding Spouse Inheritance Taxation

Although the current law allows a KRW 500 million deduction for spousal inheritance, taxing transfers between spouses raises fundamental concerns.

First, inheritance between spouses does not represent a transfer of wealth across generations. Taxing such transfers therefore conflicts with the stated purpose of inheritance taxation as a tool for moderating intergenerational wealth disparities. Reflecting this reasoning, most advanced economies—including the United States, the United Kingdom, and France—do not tax inheritance between spouses.

Second, in light of long-standing increases in women’s economic participation and changing household structures, marital assets are more accurately understood as jointly accumulated property. Taxing transfers to a surviving spouse fails to reflect this reality and may undermine housing stability and financial security. For these reasons, full abolition of spouse inheritance tax is widely regarded as appropriate, and recent political statements suggest this reform is now within reach.

◩ Limited Effectiveness in Reducing Wealth Inequality

While inheritance tax is often defended as a mechanism for reducing wealth inequality, empirical evidence suggests that its impact has been modest. Comparative analysis of wealth inequality indicators among OECD countries with high inheritance tax rates shows little improvement in Korea and the United Kingdom, and in some cases deterioration in countries such as the United States, France, and Japan (Global Wealth Report, 2003).

Conversely, research by the Korea Institute of Public Finance indicates that when inheritance and gifts are motivated by efforts to improve the economic prospects of the next generation, lower effective tax burdens are associated with improved asset distribution outcomes. This suggests that reducing inheritance tax may, in certain contexts, contribute to more favorable distributional results.

3. Policy Priorities for Legislative Reform

As discussions on inheritance tax relief gain momentum, lawmakers should avoid missing this window of opportunity for reform. Any forthcoming amendment to the Inheritance Tax Act should incorporate three essential elements:
first, a meaningful reduction in the top marginal tax rate (from 50% to 30%);
second, adoption of an acquisition-based inheritance tax structure accompanied by a simplified progressive rate schedule; and
third, complete elimination of inheritance tax on spouses.

Over the medium to long term, further reductions toward the OECD average rate—and eventual repeal—should remain policy objectives. In addition, long-standing issues such as easing eligibility criteria for family business inheritance deductions and revisiting valuation premiums and discounts for inherited shares warrant continued legislative attention (Lee Se-jin et al., 2023).

Korean version: https://www.cfe.org/bbs/bbsDetail.php?cid=issue&pn=1&idx=27394