[Opinion] Korea’s inheritance tax—twice the global level—harms economic growth

I visited a special exhibition featuring artworks once owned by the late Samsung Chairman Lee Kun-hee. From Jeong Seon’s *Inwang Jesaekdo* to Monet’s *Water Lilies*, it was astonishing to see with my own eyes masterpieces I had only ever encountered in art textbooks. It was even harder to believe because so many world-famous works from both East and West were gathered in a single exhibition. Once again, it was clear that the “Lee Kun-hee Collection” truly deserved its global reputation.

The decision to donate such a vast personal collection—not even held in the name of the Samsung Foundation—could not have been easy. Why did he donate all of these works? Behind it lay Chairman Lee’s ambition to create in Korea a world-renowned modern art museum like New York’s MoMA or Britain’s Tate. At the same time, I was reminded of news reports about the staggering inheritance tax facing the Samsung family.

In Korea, artworks cannot be used to pay inheritance tax. This is because the system of payment in kind, under which artworks or cultural assets can be submitted in lieu of tax, is not permitted in Korea. In order to pay inheritance tax, heirs have no choice but to dispose of such assets and convert them into cash. If artworks appraised at more than 2 trillion won apiece had been sold off, they likely would have been taken overseas. Faced with such astronomical inheritance taxes, I found myself wondering whether the works I was viewing could really have remained accessible as part of the public’s cultural life as they are now, had they not belonged to Chairman Lee, who had long shown deep interest in patronage of the arts.

In April 2022, Samsung announced that Chairman Lee’s total estate amounted to 26.1 trillion won. The inheritance tax on that estate came to about 12 trillion won. In other words, nearly half of the entire estate had to be paid in inheritance tax. Even for the Samsung family, it is burdensome to pay inheritance tax equal to half of an estate in cash. The family announced that it would pay 2 trillion won in inheritance tax each year through 2026, and even with installment payments, it still falls short by 800 billion won beyond the dividends received from Samsung shares. In fact, when making the first payment, the Samsung family had to take out loans to cover the shortfall.

Korea’s inheritance tax burden is abnormally high. Even by global standards, the inheritance tax rate is exceptionally steep. The top inheritance tax rate for lineal descendants is 50 percent. That is nearly double the OECD average top rate of 25.3 percent. Moreover, when stocks are inherited, if the heir is the controlling shareholder, a 20 percent premium valuation is added to the stock’s assessed value for taxation. In effect, when this controlling-shareholder premium and the existing inheritance tax are combined, the effective tax rate can reach as high as 60 percent. In other words, Korea maintains one of the highest inheritance tax burdens in the world by imposing this premium without sufficient justification. Chairman Lee Kun-hee’s inheritance tax was likewise calculated by applying the top inheritance tax rate plus up to a 20 percent premium on the stock valuation. Even with a 3 percent deduction for voluntary filing, the tax rate remains enormous.

Some readers may think that, because this is Samsung, it is socially appropriate for them to pay that much. But even a conglomerate like Samsung can barely manage it, resorting to loans. The inheritance tax set by law applies equally to all businesses. For mid-sized firms, however, the situation is entirely different. In fact, many familiar companies have been forced to give up succession, sell themselves, or go bankrupt because they could not bear the high inheritance tax burden. Lock&Lock, once famous as a “must-have household item” for its food storage containers, sold management control to the Hong Kong-based private equity firm Affinity in 2017 because it could not shoulder the high inheritance tax. Its equity value has since been cut roughly in half, from 630 billion won to 290 billion won. A tax policy ostensibly designed to redistribute wealth fairly across society ended up killing a growing company.

High inheritance taxes also adversely affect Korea’s stock market. Stocks, which make up a large share of corporate estates, are subject to an unreasonable method of valuation for inheritance tax purposes. The problem is not only the excessive inheritance tax caused by the controlling-shareholder premium valuation rule, but also the timing used to assess the value of inherited shares.

The method of valuing shares based on the stock price at the time of the deceased’s death is often cited as one cause of the Korea discount. If the market price changes significantly after the inheritance tax has been paid, the heir can end up either gaining or losing accordingly. In Korea, inheritance tax on stocks is based on the average of the daily closing market prices announced during the two months before and after the deceased’s death. As a result, if a company depresses its stock price during that period to reduce inheritance tax and then raises it afterward, there is no effective way to prevent it.

Korea’s inheritance tax, with its absurdly high rate and valuation standards that are no longer valid under present conditions, weakens companies and contributes to the abnormal undervaluation of the stock market. Though inheritance tax was introduced ostensibly to redistribute wealth, it is undermining even that goal by threatening the very entities that create wealth.

Excessive inheritance taxes should at the very least be lowered to international levels. In the case of stocks, Korea should consider a capital gains tax system under which inheritance tax is imposed at the time of disposal rather than at the time of inheritance. Would it not better accord with the fundamental purpose of inheritance taxation to establish policies that enable businesses to be passed on stably, thereby creating jobs and encouraging investment? This is the time to show the wisdom to see the broader forest of a harmonious economy, rather than pursue shortsighted policies that slaughter the goose that lays the golden eggs.

Sohee Cho

Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 국제 수준의 두 배인 韓 상속세, 경제 성장에 독 된다

Author: So-hee Jo

Date: 2023-01-02

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=7&idx=25246