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South Korean Deputy Prime Minister Hong Nam-ki looks over documents ahead of the fifth meeting of the Blue House’s emergency economic council on Apr. 22. (Blue House photo pool)

The Democratic Party's Apr. 22 proposal of the "collection of voluntary donations” by people returning their basic disaster allowances is an attempt to reconcile its general election pledge to pay disaster relief to the entire South Korean public while addressing concerns about fiscal soundness expressed by the Ministry of Economy and Finance (MOEF).

With the compromise produced under time pressure, it appears that the question of how it actually pans out will only be answered as the party and government coordinate specifics and the ruling party and opposition review the supplementary budget. But experts predicted the policy was unlikely to be effective due to the large uncertainties associated with new systems such as one based on donations.

The ruling Democratic Party is hoping to see a voluntary "crisis-combating campaign” along the same lines as the fundraising activities observed during the 1997-8 Asian financial crisis, as this would allow it minimize fiscal spending as the public participation rate grows. The party and administration are expected to embark on a large-scale campaign to promote participation. Once the plan is finalized, President Moon Jae-in appears likely to be the first person to donate.

“Once we have a campaign underway with the members of the National Assembly following President Moon’s lead, we could see a donation movement taking shape among the public,” a Democratic Party official said. “We’re placing trust in the people.”

Cho Jeong-sik, chairperson of the party’s policy committee, predicted, “The need for additional finances will decrease as the campaign grows with more and more high earners, social leaders, and other members of the public announcing their donations.”

As a way of encouraging participation, the Democracy Party proposed recognizing voluntarily returned allowances as donations, which would be applicable toward a tax deduction at the end of the year. Donations of basic disaster allowances may be categorized as “legally recognized donations” to the state or local government. Legally recognized donations are recognized as fully deductible within the scope of income. In the case of a person earning 1 million won (US$814) and making a legally recognized donation of 1.2 million won (US$977), a total of 1 million won would be recognized for the deduction and a 15% deduction rate would be applied. A donation of 1 million won in basic disaster allowances -- the equivalent of a four-member household -- could result in a refund of 150,000 won (US$122).

But some fairly difficult institutional changes are necessary for these procedures to become a reality. To begin with, for the government to be recognized as a subject for the raising of donated funds and items, the government’s amendment of next year’s tax laws in July will need to include related regulations. Similarly, before a decision can be made on which state account the donated funds will be moved to (such as the employment insurance fund) and what projects they will be used toward, related fund management planning and other regulations will need to be adjusted.

Some observers are expecting a certain amount of confusion as support paid in household units are refunded through individual income tax. For instance, in the case of a donation of 1 million won by a four-person household with both spouses earning income, questions could arise over whether the amount should be recognized as a donation of 1 million won or only 250,000 won (US$203) for an individual earner. Additionally, tax deduction benefits from donations apply only to those filing taxes at the end of the year. Those who do not pay income taxes cannot receive tax deductions for any basic disaster allowances returned, which has prompted some observers to suggest the establishment of separate refund procedures equivalent to tax deduction specifically for disaster allowances.

“This was not announced in consultation with MOEF, so we’ll need to have discussions with MOEF on the specifics,” a Democratic Party official said.

“While there does not appear to be any issue with that interpretation in terms of current law, we will also pursue an amendment of the law as needed,” the official added.

It’s also unclear how much the voluntary returns stand to actually reduce the fiscal burden. One prominent lawmaker from the Seoul Capital Area (SCA) predicted, “I think we may be able to save around 1 trillion won.” Saving 1 trillion won (US$813.4 million) would require no fewer than 1 million participants.

Experts were also skeptical. Woo Seok-jin, a professor at Myongji University, said, "If they had started out considering a plan for paying [support] to all South Korean and then selectively reclaiming it through tax results, it could have been easily resolved, but they ended up making it very complicated as the scope of benefits was belatedly expanded.”

"What's been announced currently looks to be only at the conceptual level, and there are likely to be a lot of detail issues in the actual implementation process,” he predicted.

Choi Han-soo, a professor of economics and trade at Kyungpook National University, said, "The effects of the coronavirus [pandemic] have been so large that this is really just the beginning of the government's support measures such as basic disaster allowances.”

"The fact that they've appeared so muddled with their first cash support will have a negative impact on future policy design,” he predicted.

By Noh Hyun-woong, Kim Won-chul, and Lee Kyung-mi, staff reporters

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