ANALYSIS Finance ministry's reluctance towards inheritance tax revision criticized

Deputy Prime Minister and Finance Minister Hong Nam-ki. Korea Times file

State think tank says 'archaic' nominal 50% tax rate out of touch with inflation

By Lee Kyung-min

Criticism is mounting against the finance ministry over its deliberate omission of measures to reduce the inheritance tax rate that is currently up to 50 percent, in a report submitted to the National Assembly for its tax policy revision session.

The move to altogether avoid discussion on the politically charged issue ahead of the presidential election next year follows brewing public frustration over the socioeconomic inequality between the haves and have-nots, an endemic problem exacerbated further by the COVID-19 pandemic.

Deputy Prime Minister and Finance Minister Hong Nam-ki reiterated at the National Assembly audit of the government in October that revisions to the highly divisive tax policy will be “among the ministry's policy reviews.”

However, the comment was apparently no more than a tactic to change the subject during the nationally televised session at the time. This calls into question whether the ministry has misled the public into increasing anticipation that the issue would be treated as a policy priority.

Further fueling criticism is the ministry being dismissive of a recommendation made by a state think tank about the need to lower the figure in line with the rise in inflation.

Korea's maximum inheritance rate of 50 percent for bequeathed assets of over 3 billion won ($2.5 million) is the second-highest among the Organization for Economic Cooperation and Development (OECD), second only to Japan's 55 percent. Inheritance tax accounts for 2.8 percent of the country's total tax revenue, far higher than the OECD average of 0.4 percent in 2019.

“The rapid increase in the number of those subject to inheritance tax over the past few years can be explained by the outdated method of tax calculation,” Seoul National University Professor of Economics Lee In-ho said. “The current policy should be revised to adjust the rate and raise the maximum deductible amount over time.”

Rep. Choo Kyung-ho of the main opposition People Power Party. Korea Times file

Conspicuous by absence

According to a report submitted to Rep. Choo Kyung-ho of the main opposition People Power Party (PPP) by the Ministry of Economy and Finance, the ministry's inheritance tax policy revision is limited to extending the installment period for paying the tax to 10 years, from the current five, for amounts over 20 million won. A maximum period of 10 years is effective in the U.S., the U.K. and Germany.

Clearly lacking were plans on reducing the rate. The ministry has stressed that a variety of deductibles are recognized to lower the tax burden, and that only 2.9 percent of inheritance recipients are taxed. The effective tax rate of between 0.55 percent and 35.1 percent is significantly lower than the nominal tax rate of between 10 percent and 50 percent, it added.

The function of the inheritance tax as a vital income and wealth redistribution tool should not be overlooked, the ministry added, saying that only 0.05 percent of inheritors are subject to the nominal rate of 50 percent.

Also stalling the discussions are lingering calls for raising the maximum tax rate, putting the ministry in a bind over the sharply divided opinions. Hence, a social consensus is improbable over whether being born into a wealthy family should be the sole reason for having one's assets protected.

The government cannot underestimate the implication of the tax rate reduction for the overall lowering of the gift tax ― the taxable amount of which is set by the same formula ― either.

However, the ministry failed to include recommendations made by the Korea Institute of Public Finance, a state think tank, on the need to revise the policy for the taxable amount to be set reflecting inflation.

In a ministry-commissioned study, the institute said that taxing at a fixed nominal rate that has remained unchanged over the past 22 years fails accurately to factor in assets, goods and services price increases, only pushing up the number of people subject to the tax. The maximum deductible amount of 1 billion won for the inheritance tax should therefore be adjusted considering inflation, it added.

Data from the National Tax Service and the institute showed that the revenue from the inheritance tax soared to over 4.22 trillion won last year, nearly doubling from about 2.25 trillion won in 2016. The figure for the revenue from the gift tax surged to 5.63 trillion won, up from 3.52 trillion won, during the same period.