The minister set out his stall on the issue a day after representatives from the Arts Council, including writer John McGahern, argued for retaining the exemption to the Oireachtas Committee on Finance.
"I have always supported the scheme and I continue to support it," Minister O'Donoghue said.
The artists' tax exemption, which was introduced in 1969 and which is currently under review, allows qualifying artists total exemption from income tax.
Minister O'Donoghue said he was in favour of retaining the scheme exactly as it is making it increasingly unlikely that a cap would be introduced making higher earners under the scheme pay tax after a certain threshold.
"The absence of a cap means that major international figures live here. This has a positive impact on the vibrancy of the Irish arts scene," he said.
The Minister added that introducing a cap might drive these artists abroad, where they would take their substantial earnings with them. He also pointed out that most of those benefiting under the scheme are very low earners.
"The Revenue Commissioners' own figures for 2001 show that over 50% of beneficiaries had earnings of less than €10,000," he said.
More than 90% had earned less than €50,000, and artists often have good and bad years in terms of income, he added.
Minister O'Donoghue's resolute stance on the exemption will carry weight with the Minister for Finance, Brian Cowen.
"I will of course do all that I can to make sure that my colleague, Mr Cowen, understands my thinking in this context," he said.
Minister Cowen will deliver his decision on the tax exemption in his budget speech next December.