Article

Macroeconomic effects of family business inheritance tax reduction: Evidence from South Korea

Authors:
  • Independent Researcher
To read the full-text of this research, you can request a copy directly from the author.

Abstract

This study examines the macroeconomic effects of family business inheritance tax reduction in South Korea using a theoretical model that addresses the problem of a family member's occupational choice decision between being a worker and being an entrepreneur. In contrast with previous studies, the model considers the distribution of firm size. The effect of the reduction in the family business inheritance tax rate on the macroeconomy is positive in this model, whereas it is negative in a model in the literature that does not consider the distribution of firm size when addressing the occupational choice decision. Calibrated results obtained using data for South Korea show that a 50% reduction in the family business inheritance tax rate increases the total labor demand, total real investment, and total sales by 0.13%, 1.88%, and 0.15%, respectively. JEL classification: H25; L11; E20

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the author.

Article
Taking a macroeconomic perspective, this study analyzes how a reduction in family business inheritance tax affects innovative firms. In addition, it examines the effects of reducing family business inheritance tax while restricting changes to the industry of inherited firms. This study is the first to analyze the relationship between family business inheritance tax and innovation using a dynamic general equilibrium model. The calibrated key results, obtained using data from Korea, show that a reduction in the family business inheritance tax rate in the absence of regulations restricting industry changes increases the number of innovative entrepreneurs. Conversely, a reduction in the family business inheritance tax rate with regulations restricting industry changes decreases the number of innovative entrepreneurs. The main policy implication of this study is that a reduction in the family business inheritance tax is costly in the presence of regulations that restrict changes to the industry of an inherited firm; therefore, the best option is to remove such regulations.
Article
Full-text available
This study analyzes the macroeconomic effects of cuts of family business inheritance tax through endogenous managerial ability focusing on medium and large-sized enterprises. Managerial ability of a descendant is a combination of inherited talents from parents and improved ability through human capital investments. Previous studies, however, depend only on the former. The endogenous approach of managerial ability avoids underestimating the positive impacts of the inheritance tax cuts. According to the empirical analysis based on Korea’s data, capital, labor, production, physical investment, and wage increase by 7.25%, 3.67%, 8.46%, 7.25%, and 4.61%, respectively, as the inheritance tax rates decrease from 50% to 0%.
Article
This paper provides causal evidence on the impact of succession taxes on firm investment decisions and transfer of control. I exploit a 2002 policy change in Greece that substantially reduced the tax on intra-family transfers of businesses and show that succession taxes lead to more than a 40% decline in investment around family successions, slow sales growth, and depletion of cash reserves. Furthermore, succession taxes strongly affect the decision to sell or retain the firm within the family. I conclude by discussing implications of my findings for firms in the United States and Europe.
Article
Taxes on estates and inheritances may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the descendants of less able entrepreneurs who were caused by continuation-friendly tax policy to keep a family business always lose relative to their status in an economy without such a policy.
Article
This paper proposes a new theory of the size distributions of business firms. It postulates an underlying distribution of persons by managerial "talent" and then studies the division of persons into managers and employees and the allocation of productive factors across managers. The implications of the theory for secular changes in average firm size are developed and tested on U.S. time series.
Article
Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance laws affects investment only in family firms that experience a succession.
Article
The purpose of this paper is to construct a quantitative equilibrium model with price setting and use it to ask whether staggered price setting can generate persistent output fluctuations following monetary shocks. We construct a business cycle version of a standard sticky price model in which imperfectly competitive firms set nominal prices in a staggered fashion. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find the amount of endogenous stickiness to be small. As a result, we find that such a model cannot generate persistent movements in output following monetary shocks.
Article
In this paper, I present empirical evidence for …ve European countries (Germany, France, UK, Spain and Italy) and the Euro-zone on whether monetary policy shocks produce di¤erent e¤ects on real output growth depending on the phase of the business cycle that the economy is undergoing (the socalled ‘state’ asymmetry). To do so, I apply a multivariate extension of the Hamilton(1989)’s Markov switching methodology. I …nd evidence in favour of ‘state’ asymmetries at the aggregate level in all the countries whereby interest-rate shocks have larger e¤ects in recessions than in expansions. I also carry out the analysis at the sectorial level and observe that this asymmetric effect seems to be di¤erent in the analysed countries when I focus on a sectorial analysis.
The link between ownership and performance in Korean Family Firms
  • S S Choi
  • M Y Lee
Choi, S. S., & Lee, M. Y. (2017). The link between ownership and performance in Korean Family Firms. Journal of Business Education, 31, 89-110.
An analysis on the economic effect of corporate income tax reduction in Korea using dynamic computable general equilibrium model
  • M K Kim
  • S T Kim
Kim, M. K., & Kim, S. T. (2010). An analysis on the economic effect of corporate income tax reduction in Korea using dynamic computable general equilibrium model. The Korean Journal of Economic Studies, 58, 75-119.
Zipf plots and the size distribution of Korean firms
  • H G Choi
Choi, H. G. (2006). Zipf plots and the size distribution of Korean firms. Journal of the Korean Official Statistics, 11, 73-95.