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The debate over how to overhaul the inheritance tax system has emerged as a key political issue as the main opposition Democratic Party of Korea (DPK) seeks to attract centrist voters ahead of a possible early presidential election, scholars and political watchers said Monday.

However, with both ruling and opposition parties deadlocked over reducing the maximum inheritance tax rate, the likelihood of meaningful reform remains uncertain, they said.

The ruling People Power Party (PPP) supports lowering the maximum rate, arguing that it would encourage productivity and enhance economic dynamics. While the DPK agrees on expanding deductions to reflect the sharp rise in asset values, it firmly opposes other changes, claiming they would primarily benefit the ultra-wealthy.

Amid this political stalemate, experts stress the urgent need for reform, pointing to the inheritance tax system's outdated structure amid the deepening economic downturn. They warn that rising asset values have made inheritance tax an increasing burden on the middle class.

"For most households, real estate makes up at least 60 percent to 70 percent of their total wealth. Some apartments that once cost around 300 million won ($21,018) now reach nearly 2 billion won. The current tax system does not reflect this sharp increase in property values, which is far from reasonable," Oh Moon-sung, chairman of the Korea Tax Policy Association, said.

"Just as income tax rises with higher nominal wages, inheritance tax should also be adjusted to account for asset appreciation," he said.

Under the current law, Korea lowers inheritor's tax burden by exempting a portion of inherited assets. The standard deduction is set at 500 million won, with an additional 500 million won deduction for a surviving spouse.

For assets exceeding 1 billion won, the tax rate varies. The maximum rate is set at 50 percent on taxable amounts exceeding 3 billion won — the second highest among the 38 OECD member countries, after Japan. Given the premium tax levied when a major shareholder inherits company shares, the effective tax rate for business owners can reach up to 60 percent.

This system hasn't been updated since the 1999 tax reform.

The business community has long argued that Korea's excessively high inheritance tax rates weaken corporate competitiveness and threaten management stability.

"When a company is passed down to a child, only 40 percent remains. How can businesses thrive and create jobs with confidence under such conditions?" Lee Jong-bae, the PPP's vice spokesperson, said.

Democratic Party of Korea leader Lee Jae-myung, center, speaks during a party meeting at the National Assembly in Seoul, Monday. Yonhap

A move aimed at presidential bid?

The recent debate was reignited by the DPK. While the need for reform has been repeatedly discussed, past attempts have stalled due to the party's strong opposition.

However, with the possibility of an early presidential election looming following President Yoon Suk Yeol's possible impeachment, this move is widely seen as an effort to court middle-class voters.

The DPK has proposed increasing the standard inheritance deduction from 500 million won to 800 million won, and the spousal deduction from 500 million won to 1 billion won. However, it remains firmly opposed to cutting the tax rates.

"I will ensure that people don't have to sell their homes and leave because of taxes," DPK leader Lee Jae-myung said. "But why should we reduce inheritance taxes by 100 billion won for someone with assets worth 1 trillion won?"

There are also doubts about the feasibility of a tax cut policy, especially after two consecutive years of significant tax shortfalls. Inheritance tax revenue has soared from 1.4 trillion won in 2013 to 12.3 trillion won in 2023.

"There is no doubt that expanding tax revenue is necessary. If the national budget becomes unstable, even well-intended tax reforms could lose their meaning," Kim Woo-cheol, a professor of tax affairs at the University of Seoul, said. "To address this, we need to diversify tax sources by imposing appropriate taxes on items like alcohol and tobacco, where prices have risen, but tax burdens remain insufficient."

Whether this long-standing debate will yield tangible results remains to be seen. On Monday, Lee proposed a marathon debate with PPP floor leader Kweon Seong-dong on inheritance tax reform.

"While inheritance tax accounts for a small portion of national revenue, its impact on the market is significant. However, it keeps turning into a political battleground. The priority should be ensuring the smooth functioning of the economy," Oh said.