South Korea Proposes Tax Cuts to Boost Domestic Stock Market and Address Falling Birth Rate
On Thursday, South Korea announced a series of tax cuts aimed at revitalizing its domestic stock market and addressing the country’s declining birth rate, which is the lowest in the world.
As part of the measures to enhance the “Corporate Value-up Programme” introduced in February, the finance ministry stated it would reduce inheritance taxes, marking the first revision of this kind since 2000.
Analysts have pointed to high inheritance taxes as a contributing factor to the “Korea discount,” which describes the comparatively lower valuations of South Korean firms. Other contributing factors include low dividend payouts and the dominance of opaque conglomerates.
Family-run companies are often disincentivized from making management decisions that would boost stock prices because higher valuations lead to increased inheritance taxes for future generations, analysts argue.
The finance ministry plans to eliminate the highest inheritance tax rate of 50%, which currently applies to inheritances exceeding 3 billion won ($2.17 million). Instead, a 40% rate, the next highest, will apply to any inheritance exceeding 1 billion won.
“There have been many requests pointing out inheritance taxes as a significant obstacle to corporate succession,” said finance minister Choi Sang-mok during a media briefing.
Choi also emphasized the need to reflect changes in economic conditions, such as the growth of middle-class wealth.
The government plans to raise the top of the lowest tax bracket to 200 million won from the current 100 million won. Taxes in this bracket are 10%.
South Korea’s current top tax rate is among the highest globally, according to the ministry: above 45% in France, 40% in the U.S. and UK, but lower than Japan’s 55%.
The proposal also includes tax exemptions on corporate income to encourage firms to increase capital returns and lower taxes on dividend income.
The government aims to raise tax benefits for investment income earned through savings accounts to attract more retail investors and relax reporting rules to facilitate foreign investment in Korean bonds, the ministry added.
To encourage households to have children, couples married between 2024 and 2026 will receive a one-time tax cut of 500,000 won per person. This initiative comes as the country’s fertility rate hit a record low in 2023.
The government will also boost tax cuts for households to help with childcare costs and exempt tax on childbirth bonuses paid by employers.
The finance ministry will submit the proposal to the national assembly, which is currently controlled by the opposition, by September 2.
($1 = 1,385.3800 won)
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