How the Inheritance Tax Invisibly Destroys Wealth

Capital Funded by Taxes Is Less Efficient

Many Companies Are Sold Because of the Inheritance Tax Burden

Radical, Realistic Reform Must Follow

I recently met an entrepreneur. He lamented that, due to all kinds of regulations, it is becoming increasingly difficult to do business in Korea. In particular, he said he is deeply worried about whether he will be able to pass his company on to the next generation because of the burden of the inheritance tax. He had recently felt a bit hopeful as discussion over inheritance tax reform became more active, but said he was greatly disappointed after seeing the reform proposal announced by the government this past March.

Korea’s inheritance tax system was established in 1950. In 1996, the Inheritance Tax and Gift Tax Act was fully revised and the top tax rate was adjusted to 45%, and in 1999 the top rate was raised to 50%. In addition, the tax base bracket subject to the top rate was lowered from over KRW 5 billion to over KRW 3 billion. In 2019, a surcharge was applied to the largest shareholders of large corporations, raising the effective rate to 60%. These rates have remained in place to this day. Korea’s top inheritance tax rate is the second highest among OECD countries after Japan, and Korea is the only advanced country that imposes an additional tax on control premiums by applying such a surcharge.

Despite these circumstances, the inheritance tax reform proposal announced by the government this past March failed to fundamentally improve the inheritance tax system. The proposal merely changed the method of taxation from an estate tax to an inheritance acquisition tax. It did no more than raise the child deduction from KRW 50 million to KRW 500 million, allow a full deduction for assets inherited by a spouse when the amount is KRW 1 billion or less regardless of the statutory inheritance share, and set the personal deduction limit at KRW 1 billion.

At its core, the inheritance tax destroys the wealth we have accumulated. It is similar to the way war or natural disasters destroy accumulated wealth. The difference is that war and natural disasters destroy wealth visibly, while the inheritance tax destroys it invisibly. When inheritance tax is imposed, businesses, land, and assets that parents saved and accumulated must be sold to pay the government in taxes. The capital that then passes to the government is used less efficiently than when it remains in the hands of the inheriting family. This is clearly demonstrated by cases in which public enterprises are operated far more inefficiently than private firms. As a result, this inefficiency ultimately destroys our wealth.

Korea’s inheritance tax is particularly destructive. There has been a growing number of cases in which companies are sold because they cannot withstand the inheritance tax burden. Representative examples include Three Seven (777), famous as the world’s No. 1 nail clipper company, and Lock&Lock, once well known for kitchenware. More recently, the number of small and medium-sized enterprises shutting down because they cannot even be sold has been increasing. In addition, more firms are seeking to relocate overseas in order to continue their family businesses because of the inheritance tax burden. In this way, not only capital accumulated over many years but also technology and managerial know-how disappear together, destroying wealth.

The destructive effects of the inheritance tax do not stop at reducing wealth alone. It also negatively affects family relationships, an important element of social development. Parents positively influence their children by diligently saving for them and leaving them an inheritance. Most parents teach their children not to squander inherited property but to use it wisely. A destructive inheritance tax not only removes the incentive to save but also weakens this natural relationship between parents and children.

Our society is extremely negative toward inheritance. The logic that “property inherited from one’s parents is unjust because it is not the product of one’s own labor” has led to a widespread belief that inheritance taxes should be used to redistribute wealth to the poor and reduce inequality.

However, rather than improving inequality, the inheritance tax has greater negative effects on society, as noted above. The transmission of wealth from one generation to the next does not in itself harm anyone else, and taxing it does not improve the lives of the poor. The lives of the poor improve when the amount of capital in our society increases. A destructive inheritance tax reduces saving and capital in our society, weakens the economy, and reduces jobs, thereby harming the poor instead.

For this reason, the welfare state of Sweden abolished its inheritance tax in 2005, and 15 of the 38 OECD member countries have no inheritance tax. Korea, too, needs to seriously consider abolishing the inheritance tax. Even if abolition is not pursued, it is still necessary to substantially raise deduction limits and adjust tax base brackets or tax rates so that the inheritance tax system better reflects reality. Although prices have risen 97% since 1996 and more than 70% since 1999, the tax base brackets and tax rates have remained fixed, leaving even middle-class households that own a single apartment facing inheritance tax bills of hundreds of millions of won.

The inheritance tax is like killing the goose that lays the golden eggs. People’s lives cannot improve by destroying wealth. If we want to improve the lives of the people, we must radically reform the inheritance tax.

Jaewook Ahn, Chairman, Center for Free Enterprise (CFE)

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Original title: 보이지 않게 富를 파괴하는 상속세

Author: Jae-uk Ahn

Date: 2025-04-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=27515