[Tax Story] The Interrelationship Between Taxes and Donations

Professor Ahn Chang-nam, Department of Economics and Taxation, Gangnam University

The donation promises made by two self-made entrepreneurs have become a hot topic. They share the common experience of having grown up in poverty and difficult youth. Their confessions?one born as the son of a poor farmer in Damyang, living with eight family members in a single-room house, and the other born near Bogildo on Soando Island, lodging and eating in rooms used by restaurant customers?are strikingly similar. The fact that the donations come from the donors’ own pockets, not corporate funds, and are intended for the “socially vulnerable” is an attitude that only “clean rich” individuals can adopt.

The role of helping the socially vulnerable can be fulfilled by the government through taxes, but there are limits due to the need to maintain fiscal soundness. One might say, why not just raise taxes? However, this is not easy. Corporate and income tax rates are already at levels comparable to major countries such as the United States and Europe. Although there is room to raise value-added tax rates, doing so raises concerns about the regressive nature of the tax, which would increase the burden on the poor.

If donations are used to alleviate income inequality among the socially vulnerable, they fulfill a role that taxes alone cannot. If raising taxes is realistically difficult, the government needs to implement income redistribution policies, such as helping the socially vulnerable through donations.

However, the benefits of donation tax systems differ depending on whether they use a tax credit or a tax deduction method. The former provides a uniform tax benefit of 15% regardless of the amount of the donation (current tax system). The latter grants benefits calculated by multiplying the donor’s income tax rate (6%-45%) by the donation amount (previous tax system). For example, if taxpayer “Gap” has an income of 10 billion KRW and donates 4 billion KRW, under the current system, the tax benefit is 600 million KRW (4 billion KRW × 15%), whereas under the previous system, the tax benefit is 1.6 billion KRW (4 billion KRW × 45%), calculated by applying the 45% income tax rate on 10 billion KRW. Given this situation, it is difficult to actively encourage high-income earners to donate under the current tax credit system.

The U.S. donation tax system allows a full income deduction for donations up to 60% of total income, and France deducts 66% of the donation amount from taxes. These are much more generous than Korea’s system. In the above example, if “Gap” donates 4 billion KRW in France, he would receive a tax credit of 2.6 billion KRW.

It is said that “where your treasure is, there your heart will be also.” In a world rife with selfishness, altruistic acts of voluntarily giving up one’s own money for others deserve praise. This is a vivid sign of the existential mode of being pointed out by German sociologist Erich Fromm in his book To Have or To Be?

If entrepreneurs comply with legal procedures, work hard to build their businesses, generate maximum profits, and then honestly and voluntarily return part of it to society through taxes or donations, mature capitalism can flourish in Korea instead of the mammonism-based vulgar capitalism (cheonmin capitalism) that places the highest value on money.

The sincere confession of the donor, “The wealth I have accumulated is due to God’s blessings beyond my ability and effort and the help of many people,” deeply moves us as it shows the possibility of establishing mature capitalism in Korea. I hope the tax system will support the emergence of more clean rich individuals. Then, the answer to the era’s demand for reducing income inequality will come as a bonus.

Changnam Ahn, Professor, Department of Economics and Taxation, Gangnam University