[Editorial] Inheritance Tax Reform

Recently, Chung Yong-jin, vice president of Shinsegae, announced that “I will assume the presidency of Shinsegae after paying all the necessary inheritance and gift taxes.” The tax Chung has to pay is estimated to be as much as 1.0 trillion won. However, this amount has little effect in threatening his managerial position as a group owner.

Most conglomerates, however, are facing different situation. Because of the disproportionate tax rates of inheritance and gift taxes, it is practically impossible for them to protect their family ownership. Therefore, they often attempt illegal tax evasion and look for expedient ways when group owners inherit their properties.

The current tax rate on inheritance and gifts is 50 percent, according to a comprehensive tax base that imposes a heavy tax on all kinds of inheritances and donations. Considering the fact that there are few companies whose owners have more than five percent of their company’s stock, the law completely blocks company successions. As a result, it pushes companies to look for an expedient way for tax evasion. This also generates extra costs now. Meanwhile, those who hesitate or are afraid of illegal tax evasion intentionally refrain from company growth or unreasonably spend money. In regard to this, the Federation of Korean Industries pointed out that in such cases, company owners tend to give more preference to dividends than investment.

It is a global tendency to lift or reduce inheritance taxes because government authorities in other countries are afraid that such a heavy tax might retard the growth of private companies in the global market. For example, the U.S. government lifted inheritance taxes permanently, which used to be paid by parents who leave properties to their daughters or sons. Canada, Italy, Sweden, Hong Kong, and Singapore have also lifted or plan to lift the inheritance tax. Such series of actions come from the authorities’ considerate determination that it is much better to generate social wealth and job opportunities by encouraging the growth of private companies than by collecting large amount of taxes at one time.

As a means of preventing company owners from passing down stocks to their offspring to keep their family’s ownership, many companies in other countries adopt graded voting rights. For example, even though the Ford Motor Company owner has a 3.7 percent share, he has 40 percent of the voting power. Google also has recently issued stock to a group owner who has voting rights 10 times more powerful than that of small shareholders. This action is a result of the group’s effort to perpetuate the founder’s initiative and encourage the strong points of the owner’s management philosophy.

In law-governed countries, it is very natural to pay taxes. However, keeping them at a reasonable level is a prerequisite condition for the harmonious combination of legal justice and economic efficiency. Given the fact that second and third-generation family ownership is increasingly prevalent nowadays, it is time to draw up a social consensus about the reasonable level of inheritance and gift taxes. A graded voting rights system in favor of heavy stockholders is one of the ways we can take this into account.