Study finds 23% flat tax could boost Exchequer revenue by €5bn

A study by accountants KPMG has estimated Renua Ireland's core policy of a 23 per cent flat tax rate would give a boost to the Exchequer worth almost € 5 billions per annum.

If the 23 per cent rate was introduced across all income bands it would result, on paper, with a tax take slightly lower than the current net tax yield of €15.8 billion per year. In the case of both the current tax and the flat tax scenario, child benefit and family supplement payments continue to be paid at current rates.

However, the independent KPMG report, entitled Irish Income Tax Policy, estimates that the “broad and dynamic effects” of a flat tax would be worth €4.7 billion. Flat tax means a single rate for all taxpayers regardless of income level and type.

This calculation is based on tax income elasticity of 0.5 per cent for those earning above the standard rate . It cites studies to show that reductions in marginal income tax rates can lead to smaller reductions in tax take than the percentage reduction. It also points out that 20 per cent of the tax foregone would come back to the State in indirect taxes such as Vat.

The study does not include correcting elements included in the Renua policy such as graduated payments for those on lower incomes.

The study has said a major argument put forward by flat tax advocates is that it has a positive impact on the economy - encouraging work, entrepreneurial activity as well as capital formation.

“Where the flat rate on income is set at a lower rate than the current marginal rate, this could act as an incentive to promote employment generation as individuals would retain a higher percentage of after-tax income from earnings.

“This could incentivise an employer by allowing the employer to deliver higher amounts of net pay to employees for lower gross payroll cost or could incentivise employees to return to work.”

Policy criticised

The Renua policy has been widely criticised by its political opponents as being tilted towards higher earners rather than lower earners.

Renua’s flat tax proposes to abolish the current system of a two-tier income tax system and the universal social charge. Those on lower incomes would be entitled to a graduated payment to ensure they paid no more tax than at present. There would be graduated payments to balance potential losses for those earning up to €70,000.

Under the system middle-income and high income couples would benefit most. A couple earning €100,000 would take home an extra €15,000 in net pay.

The KPMG study is based on the rate of 23 per cent and does not include the correcting elements included in the Renua policy.

Renua’s opponents have attacked the tax on a number of fronts. They have contended that those on lower incomes would end up with an unfair burden of tax while those on very high incomes would be the biggest net beneficiaries, seeing their tax rate fall.

They have also asserted that because the rate is pitched so low compared to the current marginal rate of 41 per cent, it would result in a loss of between €3 billion and €5 billion to the Exchequer once the correcting elements are included.

But the report will support the party’s argument that a flat tax will provide an incentive to employment and to work and that the “dynamic” effect would effectively close that gap. It has also proposed shutting down all existing tax shelters which it says could net €7.5 billion for the Exchequer.

For its part the KPMG report addresses the argument that flat taxes increases the tax burned for low and middle-income earners. “We believe that an earned income tax credit ought to lift the relative position of the most vulnerable group of workers (ie. those on low wages with children to support). This can create a ‘win-win’ by reducing inequality, reducing poverty, increasing incentives to work and driving economic growth.”

Michael Noonan said over half those who paid tax in the State earned less than €30,000 per annum. He was responding to a parliamentary question submitted by Labour TD Joanna Tuffy before Christmas. He said that group currently contributes just over 4 per cent of total tax take.

He said that with a flat tax of 23 per cent, their combined contribution would increase almost five fold to 20.4 per cent. That is with taking any corrective measures such as an earned income tax credit into account.