A large number of young venture startup CEOs in their 30s and 40s believe that the current inheritance tax should be abolished or lowered, according to a survey.
On Oct. 29, the Korea Enterprises Federation (KEF) conducted a survey on the perception of Korea’s inheritance tax system among 140 venture startup CEOs in their 30s and 40s. The most common response (43.6 percent) from them was that the inheritance tax should be abolished and replaced with a capital gains tax.
A significant number of respondents (41.4 percent) also said that the inheritance tax should be reduced to the average of those in the member countries of the Organization for Economic Cooperation and Development (OECD). The current top rate of inheritance tax was viewed negatively by 85 percent. On the other hand, only 9.3 percent said the current level is appropriate and only 4.3 percent said it should be raised to prevent wealth transfers and ease inequality.
Korea’s inheritance tax is levied at a rate of up to 50 percent (60 percent due to an extra charge rate for the largest shareholders) depending on the amount of tax bases. This is the second highest among OECD member countries after Japan (55 percent) and twice the average (about 25 percent as of 2022).
Currently, out of 38 OECD countries, 24 have inheritance tax and 14 do not. Instead of inheritance tax, countries like Australia, Canada, and Sweden have a capital gains tax, which taxes gains on the sale of inherited property in the future.
Nine out of 10 respondents also said that inheritance taxes weaken entrepreneurship and increase the Korea Discount, which lowers the value of Korean stocks. When asked if the inheritance tax affects entrepreneurship, 47.9 percent said it does so to a great extent and 45.7 percent said it does so to some extent.
Regarding inheritance tax’s impacts on Korean company valuation, 96.4 percent of the respondents said that inheritance tax is causing owners of Korean companies to be inactive in boosting share prices, or even to prefer lower share prices, thereby deepening the Korea Discount.
Due to the perception that the inheritance tax burden is excessive, 68.6 percent of the respondents said that they do not want to pass on their current business to their children due to management burdens and 20.7 percent said they plan to pass on it to their children. When asked if reducing the inheritance tax burden by lowering the inheritance tax rate and expanding a cut in the inheritance tax would help companies expand investment and create jobs, 69.3 percent said yes.
“The government and the National Assembly should take an active role in rationalizing the inheritance tax system to encourage young entrepreneurs to take on challenges and enhance the permanence of ventures startups,” said Ha Sang-woo, head of the Economic Research Center at the KEF.
On the other hand, others say that lowering the inheritance tax can aggravate inequality. “Over the past 10 years, the total amount of family inheritance deduction and family succession tax exemption has reached 1.83 trillion won [US$1.35 billion] and 1.58 trillion won, respectively,” the Citizens’ Alliance for Economic Justice said in a recent commentary. “Since 2017, the number of applications for family succession tax exemptions and exempted amounts have outpaced family inheritance deductions.”
“This phenomenon means that economic and social polarization is becoming very serious as free transfers of wealth are rapidly progressing in Korea, and as a result, the constitutional values of democracy and equal opportunities are being undermined,” the civic group added.
Meanwhile, Deputy Prime Minister and Minister of Planning and Finance Choo Kyung-ho responded to a related question from Representative Joo Ho-young of the National People’s Party on the need to improve the inheritance tax rate during an audit of the administration by the Planning and Finance Committee at the National Assembly on Oct. 20. “I agree with you in the big picture,” Choo said, “Whenever we advance a discussion about it, we hit a snag due to antipathy toward wealth transfers. Whether it is discussed in the National Assembly or among ordinary people, Korea is not ready to accept this topic yet.”