Amending the Inheritance Tax Act Must No Longer Be Delayed

The second-largest shareholder of NXC, the holding company of game company Nexon, is the Ministry of Economy and Finance. In effect, a game company has become a state-owned enterprise. This happened because an enormous inheritance tax was imposed following the sudden death of Nexon founder Kim Jung-ju. The bereaved family paid the inheritance tax, which amounted to several trillion won, through an in-kind payment of shares.

Korea’s inheritance tax is at a predatory level when it comes to businesses. The top inheritance tax rate is 50%, but with the premium rate applied, it rises to as high as 60%. Demanding that more than half be paid in taxes is virtually the same as saying the government will take away a person’s property. It amounts to a form of social plunder.

The Nexon Group has NXC as its holding company and several subsidiaries under it. Nexon, which began as a game company in 1994, ended up with the government holding 29.3% of its shares in less than 30 years. Compared with the largest shareholder’s 34%, this is a very substantial stake, enough to sway control of the group. It is deeply shocking that inheritance tax has allowed the government to acquire a stake large enough to threaten the largest shareholder.

If a company founder’s management control can be threatened as soon as the first generation of management comes to an end, that means our inheritance tax system is not friendly to businesses. If such an anti-business inheritance tax regime remains in place, it will be difficult to sustain and develop the business ecosystem.

Turning companies into state-owned enterprises through inheritance tax threatens the sustainability of the corporate economy. The drive to found, maintain, and develop a business comes from entrepreneurs. If taxes threaten management control by the very next generation, that lowers entrepreneurs’ incentives to start businesses and eliminates their incentives to develop them.

Some argue that the government can simply dispose of the shares it holds and return the company to private ownership. But once the government owns shares, it tends not to dispose of them for a long time. In the end, the company’s character changes, and it begins to take on the features of a state-owned enterprise. It also becomes prone to complacency. It was no coincidence that unimaginable corruption occurred at Daewoo Shipbuilding & Marine Engineering when it was held by the Korea Development Bank. Even if only temporarily, once the government acquires a stake large enough to pressure management control, invisible pressure from the government and bureaucratic-style interference increase. Ultimately, the company loses the dynamism and creativity of a private enterprise.

For those who view things through an anti-capitalist lens, turning private firms into state-owned enterprises may seem desirable. That logic holds that it is good to strip controlling families of their management rights and place companies under social control. The term “national company” is also used in that sense. The problem is that such companies tend to adopt a bureaucratic attitude of maintaining the status quo rather than seeking growth. They fail to respond effectively in market competition and instead fall into management that is content with present conditions.

When the government temporarily holds corporate shares, it needs to adopt a method of holding and disposing of them through the market. It is problematic if, like the Korea Development Bank, shares are held for the long term for institutional benefit, resulting in the undermining of a company’s functions.

It is itself a serious side effect when businesses shrink or disappear because of inheritance tax. When a company is sold because it cannot bear the inheritance tax burden, its value is often damaged. The role of a company’s head in its existence and performance is absolute. In particular, a founder’s judgment and managerial know-how are not easily passed on. When a company is sold and transferred to a third party, it often fails to achieve the same management performance as before. The resulting social costs are substantial.

If a company is forced to shut down because of the inheritance tax burden, the harm is severe. The very existence of a company means it is making a major contribution to society. A profitable business that employs people is, in itself, a contribution to society. Threatening such a business creates enormous social losses.

Even when a company is dismantled and investment is shifted to another country because the inheritance tax burden is too great, the domestic damage is significant. For the company, moving overseas may be a new challenge and have the effect of restructuring its operations because it creates jobs abroad, but domestic jobs decline by that much.

Korea’s inheritance tax rate is excessively high. The top rate is 50%. Moreover, the structure is one in which the progressive rates rise sharply, creating a strong temptation to engage in tax-saving measures. If it were a tax rate borne equally by everyone, negative feelings about paying it would not be so strong. There would be no reason to go out of one’s way to avoid paying a tax that everyone pays. But when progressive rates become severely steep, resentment toward a tax that must be borne like a fine can only grow. A society that uses taxes as a punitive tool is not a healthy society.

Leaving property behind is something to be praised, not punished. Leaving an inheritance is a desirable act that any responsible member of society ought to do. A punitive inheritance tax that effectively tells people to spend it all on taxes or let it disappear harms the continuity of society. Even if society cannot provide incentives for consideration toward the next generation, it is wrong to punish it.

The current inheritance tax is an even bigger problem because it is structured like a death tax. It imposes a tax burden on the property of the deceased, who already bore income tax while earning that money. Not only does it strongly resemble double taxation, it also places excessive responsibility on the deceased who left a legacy to our society.

The harms of inheritance tax have accumulated in our society over a long period, yet no serious attempt has been made to correct them. That is because reforming inheritance tax has been seen as politically unpopular, even if the corporate economy loses vitality and jobs are lost. Politicians have long turned away from inheritance tax reform, placing their own political interests above the social harm, no matter how great that harm may be.

Politicians and the National Assembly must now demonstrate a responsible attitude toward the lives of the people. Our society has entered the ranks of advanced countries, and now is the time to move forward as a leading nation that helps lead the world. To boost private-sector vitality and promote economic growth and job creation, I hope for a revision of the inheritance and gift tax law that reflects present realities.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 상속세법 개정, 더는 미루지 말아야

Author: Sung-no Choi

Date: 2023-07-04

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25860