Society needs proper inheritance tax

By Dr. Jeffrey I. Kim

Senator Elizabeth Warren of Massachusetts has made a very provocative reform proposal to Democratic primary voters. She intends to reshape American capitalism by drastically changing income and wealth taxes including inheritance tax.

Also Warren wishes to impose new taxes on large companies and rich individuals. Targeting the super-rich, she has promised a 3 percent, instead of 2 percent, annual levy on net worth over $150 million.

By contrast, the late Milton Friedman who won the Nobel Prize in Economic Sciences in 1976 warned that excessive wealth or inheritance tax would destroy society.

Friedman was amazed to observe people taking greater value or utility from their children's consumption than that of their own consumption. He said, “Our society is not an individual society but a family society and with a 100 percent inheritance tax, the society would collapse.”

Friedman has stated in one of his books, “A society that puts equality in the sense of equality of outcome ahead of freedom will end up with neither equality nor freedom. On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality.”

He pointed out that one of the great mistakes is to judge policies and programs by their intentions rather than their results.

As to radical policy proposals made among the Democratic presidential candidates, former President Barack Obama has cautioned not to tack too far left in formulating reform policies. He was conscious of Democratic donors in Washington, political centrists, independent voters and moderate Republicans.

In South Korea, business owners are scared about the punitively high inheritance tax rate. After the death of Hanjin Group chairman Cho Yang-ho, his son was caught in the trap of inheritance taxes.

The nominal inheritance tax in South Korea is as high as 50 percent. If the heir inherits the largest stock holdings, the tax rate can go further up to 65 percent as a control premium of 10 to 30 percent is added. Then the inheritance tax can be twice as high as 26.2 percent of the average inheritance tax rate of OECD member countries.

There are two major reasons why the heir tax rate is exorbitantly high in South Korea. One reason is that the current government is trying to resolve the income-inequality problem within a short period. The other reason is that the people outside chaebol families or those who were not born with “a silver spoon” strongly advocate the heaviest possible inheritance tax rate.

Currently a significant number of people believe a wealth transfer tax is an effective policy tool to mitigate the income gap.

There are two types of income that exacerbate income disparity. One is the gap where people at the lowest income bracket suffer from absolute poverty. The other is the gap where the lowest income class is inflicted by relative poverty. A country with an absolute poverty problem wants to strengthen the inheritance tax.

Jealousy is a unique human instinct. People get jealous about the success of other people. They feel fearful and insecure with their competitor's success. For instance, The Book of Genesis states that Cain killed his younger brother Abel out of envy.

The Book of First Samuel records that King Saul tried to kill his son-in-law, David, out of jealousy. Saul was upset when he heard women singing, “Saul has slain his thousands, and David his tens of thousands.”

If jealousy out of relative poverty prevails widely in the economy, workers get encouraged with strengthened inheritance taxation and the overall labor productivity will increase. However, there is a trade-off.

If wealth transfer taxes are too excessive, company owners may fail to pass their business on to their children. Then it may bring about not only huge losses to the private company owners but also to society at large in terms of a rise in unemployment, discontinuation of technology advancement and market shrinkage.

The trade-off relationship between an increase in workers' morale and a decrease in company owners' morale varies by country. Therefore, policymakers, politicians, business leaders and scholars should work together to derive the most proper inheritance tax rate.

Needless to say, people need to be further educated and enlightened so as to make better choices together for society at large.

Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.