[Tax Story] Emergency Disaster Relief Fund and the Scope of Taxable Income

Baek Jeheum, Lawyer at Kim & Chang

The controversy surrounding the Emergency Disaster Relief Fund and its donations is intense. With the supplementary budget bill and donation law related to the Emergency Disaster Relief Fund passing through the National Assembly, it is expected that from as early as the 13th, all citizens will receive 1 million KRW per four-person household as the Emergency Disaster Relief Fund. Similar to the public mask sales 5-day rotation system, applications can be made on weekdays based on the birth year and must be completed within three months. From the 11th, online applications will be accepted through credit card company websites, and from the 18th, offline applications will be accepted at bank or post office counters linked with credit card companies. If receiving the fund via local love gift certificates or prepaid cards, on-site collection at the eup, myeon, or dong community centers is also possible. If the fund is not applied for within the three-month period, it is presumed that the applicant intends to donate. There is also a method of collecting donations through the Korea Workers' Compensation and Welfare Service, but in this case, the use is limited to the employment insurance fund revenue, and donations to third-party organizations are practically not allowed. Although donating the Emergency Disaster Relief Fund is optional, donation campaigns by various organizations continue.

The Emergency Disaster Relief Fund is a subsidy received from the government and is not taxable income. This is because it is not explicitly listed as taxable income under the Income Tax Act, which adopts the principle of enumerated taxation. Donors receive a 15% tax credit on donations through year-end tax adjustments or comprehensive income tax filings. Even if there is no tax payable in the current fiscal year, the credit can be carried forward for up to 10 years. Thus, the Emergency Disaster Relief Fund operates within the framework of the income tax system. As a result, citizens are given the choice of an economic benefit of 1 million KRW plus 150,000 KRW for a four-person household. This was likely considered in the tax policy decision-making process regarding the Emergency Disaster Relief Fund. If the fund were considered taxable income and a median income tax rate of 35% applied, a taxpayer who donates the entire amount would have to pay an additional 200,000 KRW (350,000 KRW - 150,000 KRW) in income tax instead of receiving benefits. The tax treatment of donors varies significantly depending on the design of the taxable income scope in the income tax system.

The tax policy functions of income tax are diverse, but its history is relatively short. Income tax was first implemented in late 18th century Britain. In 1793, during the urgent situation of the Napoleonic Wars, existing tariffs and land taxes were insufficient to cover war expenses. Therefore, in 1799, British Prime Minister William Pitt introduced income tax as an emergency measure. However, income tax was regarded as a 'devilish' system against sacred income and faced tremendous tax resistance. Until then, individuals' earnings and occupations were considered private matters, but after the introduction of income tax, the state could investigate taxpayers' every move. The fact that the first income tax was abolished immediately after the 1802 Anglo-French armistice treaty vividly reflects the era's sentiment. When income tax was reintroduced in Britain, mechanisms were devised to collect taxes at the source by categorizing income to avoid invading citizens' privacy, which became the foundation of the modern withholding tax system. The British government taxed fixed incomes such as pensions, interest, rent, and civil servant salaries, managing only banks and companies to minimize tax resistance while collecting income tax.

Setting the scope of taxable income has historically been a challenging issue. It is difficult to find direct definitions of 'taxable income' in the tax laws of Korea, the United States, the United Kingdom, Germany, Japan, or other countries. Historically, there have been various discussions, but recently, two main views prevail: the income source theory, which sees income as the total amount of goods flowing to the taxpayer within a certain period from a continuous source of production, and the net asset increase theory, which defines income as the increase in the taxpayer's net assets over a certain period. The United States and Japan are said to adopt the net asset increase theory, while the United Kingdom and Germany follow the income source theory. However, legislative examples strictly adhering to the traditional income source theory are rare, and income tax systems are built on a 'comprehensive income concept' that incorporates elements of the net asset increase theory. This is because the net asset increase theory more accurately measures tax capacity and achieves horizontal equity. Nevertheless, countries adopting the net asset increase theory do not fully scrutinize private life and set certain limitations. Korea comprehensively taxes interest income, dividend income, business income, earned income, pension income, and other income, while classifying retirement income and capital gains separately and partially taxing some financial income separately, which is evaluated as designed from the income source theory perspective. However, by establishing comprehensive taxation provisions by income type, the trend is moving closer to the comprehensive income concept.

There are many interesting cases regarding whether various economic benefits of taxpayers constitute taxable income. Among them, the taxation of fringe benefits, such as parking spaces or lunch meals provided by employers to employees, is notable. When income tax was first introduced in the United States in 1913, tax authorities ruled that evening meals and free railroad passes provided by employers to railroad workers were excluded from taxable income. In 1937, the U.S. Court of Appeals ruled that meals and suite rooms provided to a hotel manager in Hawaii were for the employer's convenience and incidental economic benefits, thus not taxable income. Later, in 1984, U.S. tax law was amended to include fringe benefits as taxable income but with many exceptions. For example, meals and lodging provided at the workplace, discounts, commuting and moving expense subsidies remain excluded from employees' taxable income. In Korea, most fringe benefits are also broadly exempt from taxation.

Today, global discussions on income tax systems are summarized by the principle of 'broad tax base, low tax rate' based on the comprehensive income tax concept. Korea adopts the net asset increase theory in corporate tax but maintains the income source theory in the Income Tax Act. It is necessary to expand the scope of taxable income in the income tax system to align with global standards and equity principles, but voices concerning infringement on individual freedoms during this process must also be heeded. For example, during year-end tax adjustments, taxpayers must disclose personal information such as family relations, health, assets, religion, education, and political views, raising concerns about privacy violations. The over two-century journey of income tax based on the principle of equitable taxation encapsulates the history of modern democracy. At this critical juncture, wisdom is needed to refine the concept of taxable income through a balanced consideration of the values of 'equity' and 'individual freedom' rather than resorting to temporary expedients for immediate convenience.

Baek Jeheum, Lawyer at Kim & Chang

This content was produced with the assistance of AI translation services.