# Hibernia Forum's proposal for a flat tax



## Brendan Burgess (6 Oct 2015)

Their main tax proposal was for a flat rate tax, but they gave no details of the proposal when I asked what rate it would be at.

The Financial Times Ireland Correspondent, Vincent Ryan(?) described it as a "crank proposal" which the Tea Party proposes every 4 years or so. 

While I agree that social welfare rates are way too high, which are funded by marginal tax rates which are far too high, going to a flat rate seems to be a step too far. But that it the point of a think tank. To raise these sorts of ideas which political parties would be reluctant to raise, although Renua stole their thunder yesterday by proposing just such a tax.


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## Sarenco (6 Oct 2015)

Brendan Burgess said:


> The Financial Times Ireland Correspondent, Vincent Ryan(?) described it as a "crank proposal" which the Tea Party proposes every 4 years or so.



Well all the Baltic states, and a number of other eastern European countries, have flat rate taxes on personal income so it's hardly a "crank proposal".  I would personally prefer if we maintained a progressive income tax system but there are certainly arguments that can be made in favour of a flat rate.


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## Brendan Burgess (6 Oct 2015)

The FT guy said that no developed country had a flat rate system.  The Hibernia guys quoted the Baltic states and the FT guy said that they were not developed. 

Brendan


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## Sarenco (6 Oct 2015)

Brendan Burgess said:


> The FT guy said that no developed country had a flat rate system.  The Hibernia guys quoted the Baltic states and the FT guy said that they were not developed.
> 
> Brendan



Well, that's true (as per the MCSI and FTSE classifications as to what constitutes a "developed market") but that doesn't sound like a very convincing argument to me.

Don't get me wrong, I wouldn't be in favour of introducing a flat tax rate on personal income although I wouldn't simply dismiss the idea as a "crank proposal".  I think a progressive income tax system is entirely justifiable on grounds of social solidarity and moderating the effects of income inequality.

But from what I've read, I suspect the Forum members would simply dismiss me as a bleeding heart, pinko liberal!


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## Brendan Burgess (7 Oct 2015)

Here is the excerpt from their website: 

*TOO FEW PEOPLE PAY TOO MUCH TAXATION IN A SYSTEM THAT IS OVER-COMPLICATED*

*Tax and Welfare Systems Don’t Just Shield the Poor, they Shield the Middle Class Too*

Citizens may believe that the Irish tax and welfare systems operate in a way where the broad public contributes to a minority who have low incomes. In fact, the broad public benefits from a minority who have high incomes. This is the unavoidable conclusion from an examination of data from Table A2 of the CSO’s most recent (2013) Survey on Income and Living Conditions (SILC). That shows that it is not just the bottom three deciles (or tenths) of the population that are in receipt of significant net state transfers but the bottom six deciles. Net state transfers are defined as social transfers less tax and social contributions.

While the seventh income decile makes a small net contribution to the state’s coffers, it is the top three income deciles that are effectively paying for the Irish state with the top decile bearing over half of the net cost of the State. It is right that those on higher incomes should bear a higher share of the burden of supporting the poor. But is it right that those on middle incomes (deciles 4-6) should be net recipients of significant state transfers? Is it proper that those in the fourth decile – rather than those in the poorest, first, decile – should be the recipients of the highest net benefits?

*Ireland’s Income Tax System is Extremely Progressive*

Ireland has the most progressive income tax system (including employee social insurance contributions) in the EU. The tax paid by a single person on half average earnings(average earnings are just under €34,500) is the second lowest in the OECD (out of 34 countries) and is about one-tenth that in Denmark while the tax paid by a single person on two and a half times average earnings is the 7th highest in the OECD. At average income levels we are the 15th highest in OECD. A single worker on an average income of about €34,500 pays about €13,000 in income tax and social insurance contributions in Denmark compared to over €6,000 in Ireland a difference of over €6,500.

*Ireland’s Tax System is Overly Complicated *

The 2009 Commission on Taxation reported that there is evidence to suggest that, if economic growth is the main policy aim to be pursued, a flatter income tax structure is a more appropriate instrument than one that leans towards greater progressivity, as the latter is likely to act as a disincentive to further effort. According to an OCED working paper:

_A flat tax system with few allowances and tax credits is generally simpler to administer and probably gives rise to fewer tax-induced distortions than other systems, but it puts less emphasis on redistribution. By contrast, a highly progressive income tax system normally reduces incentives to work and to invest in human capital, although ‘in-work benefits’ can improve work incentives for low wage workers while increasing progressivity. High progressivity may also increase the incentives for tax avoidance and tax evasion and contribute to a growing shadow economy that reduces measured GDP, although it is arguable that the tax level is more important than its progressivity in this regard. This may reduce tax revenues and undermine the fairness of the system. There is also a possibility that high top marginal rates will increase the average tax rates paid by high-skilled and high-income earners so much that they will migrate to countries with lower rates resulting in a ‘brain drain’.  _

Internationally, where a flat tax has been introduced, the tax take has tended to increase. Similarly, the black market has shrunk as the incentive to under-declare personal liabilities is diminished. And costs of compliance have fallen due to radically more simple nature of the system.



*Flat Tax* *Rate *
Lithuania   15%
Romania 16%
Hungary 16%
Estonia 21%
Latvia 25%

*Hibernia Forum calls for:*


*A rebalancing of tax and welfare over the next decade to significantly reduce middle class welfare *(i.e. aim to eliminate the net benefit currently enjoyed by deciles 4-6) so that the burden borne by the top three deciles can be reduced.



The *introduction of a Flat Tax to replace income tax, employees PRSI and USC*. We will prepare and present a detailed report on this proposal in the future.


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## Brendan Burgess (7 Oct 2015)

I can't access Renua's website for some reason. Anyone got a working link? 

I copied this from Twitter



Presumably, not everyone can be better off.

I support cutting tax rates which are too high and cutting social welfare which is too high.  But I think that those who are proposing it should spell it out.


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## Sophrosyne (7 Oct 2015)

Comparisions of flat tax rates in the Baltic States would also have to include comparisions of Social Insurance contributions of employers and the self-employed in those states, which are considerably higher than in Ireland.


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## Firefly (7 Oct 2015)

Brendan Burgess said:


> Presumably, not everyone can be better off.



Whilst I am in principle in favour of a flat-rate to make work more attractive, the devil would be in the detail and I think it would hit those on lower incomes most:

Take a single person on 30,000PA. Under the flat rate of 23% they would pay 6,900 in tax leaving them a take-home pay of 23,100. Using Deloitte's income tax calculator, the same person would take home 24,855, so they would be 1,755 worse off...quite a bit for someone on low pay to bear.

Taking someone on 150,000PA, under the flat-rate they would pay 34,500 in tax leaving them a take-home pay of 115,500. Again using Deloitte's income tax calculator, their take home pay currently would be 83,616 meaning they would be better off to the tune of 31,884 under the flat rate of tax model

I realise these are basic comparisons and I just entered the salaries into Deloitte's calculator going with the default options. There are many other things at play but nevertheless, this would be cannon fodder for those of a Left-leaning persuasion.

http://services.deloitte.ie/tc/Default.aspx


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## Brendan Burgess (7 Oct 2015)

Hi Firefly 

I would roughly agree with you. But I gather that a flat tax is a bit more complicated than that. It's a flat tax above a certain income level. But all the other credits are gone.  I have suggested to the Hibernia Forum that they need to do a detailed paper on their proposals. 

Brendan


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## Brendan Burgess (7 Oct 2015)

Firefly said:


> There are many other things at play but nevertheless, this would be cannon fodder for those of a Left-leaning persuasion.



But this almost total acceptance of high social welfare and high taxes on the higher off needs to be challenged.  It's crazy that the government is considering taking even more people out of the tax net.


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## Brendan Burgess (7 Oct 2015)

Creighton has an article in the Irish Times here

http://www.irishtimes.com/opinion/a-flat-tax-would-see-everyone-play-by-the-same-rules-1.2378783

Our proposal would abolish USC and employee’s PRSI and introduce a flat tax rate of 23 per cent. Our research shows that such a tax system – when the abolition of all reliefs is factored in – would result in a tax take of €12.33 billion, versus the current take of €15.84 billion. Though this equates to a difference of 22 per cent in tax take, this is within the proposed broad and dynamic effect our external advisers recommended for such a scheme. By this we mean that the impact on the black economy, on spending – and the cash flow and VAT take which accompanies such spending – would balance out the reduction in tax revenue.

...
When the Government appointed an expert group in 2013 to promote entrepreneurship, one of its key job creation proposals was a flat tax on all income – three decades after the 1980 Commission for Taxation recommended the same. In 1980 the government ignored the advice and chose 70 per cent marginal tax rates, and the result was a litany of tribunals, tax amnesties and Ansbacher accounts.


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## Brendan Burgess (7 Oct 2015)

It's hard to credit that the €3.5 billion shortfall would be made up from the impact on the black economy and the increased spending. 

Such arguments damage the credibility of the proposal. 

It's interesting to see that it was recommended in 2014 by the government appointed [broken link removed]


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## Sophrosyne (7 Oct 2015)

I would like to know how Renua is arriving at its figures in “The effect of the flat tax”.

Also, in the case of married couples, what difference would the number of children make, since under the current or proposed tax regimes there are no reliefs for children?


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## Protocol (7 Oct 2015)

Sophrosyne said:


> Comparisions of flat tax rates in the Baltic States would also have to include comparisions of Social Insurance contributions of employers and the self-employed in those states, which are considerably higher than in Ireland.



Yes, PRSI rates can be much higher than the 4% ee here.

http://www.oecd.org/tax/tax-policy/tax-database.htm#ssc


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## Brendan Burgess (11 Oct 2015)

Brendan Burgess said:


> It's hard to credit that the €3.5 billion shortfall would be made up from the impact on the black economy and the increased spending.
> 
> Such arguments damage the credibility of the proposal.



Cormac Lucey, who is a strong advocate of a flat tax, is highly critical of Renua's claims in today's Sunday Times 

"The key passage in the Renua document states: “Our conservative projections across the income bracket show that this rate of tax will generate approximately 75%-80% of the existing income tax head of taxation. As people will retain 77% of their current income and of any additional income they earn on top of this, secondary factors and multiplier effects will generate more than the remaining 20% of the current rate of collection.”

This statement is rather disconcerting. It suggests that in the absence of the anticipated “secondary factors and multiplier effects”, such as higher consumer spending leading to more VAT, Renua’s flat-tax proposal would cause the state’s income tax proceeds to drop by 20%-25%. With income tax revenues of €18bn budgeted for this year, it could trigger an annual funding gap of €3.6bn-€4.5bn. Might Renua’s expectations of multiplier effects on such a scale be reasonable?

A working paper from the International Monetary Fund (IMF) suggests not. The authors of a 2006 report, The Flat Tax(es): Principles and Evidence, found flat taxes that have been adopted differ significantly and that empirical evidence on their effects is limited. “This precludes simple generalisation, but several lessons emerge: there is no sign of Laffer-type behavioural responses generating revenue increases from the tax-cut elements of these reforms.
...
If income tax revenues were to fall from 100% of current levels to 80% — assuming no Laffer curve — it suggests Renua expects an uplift of 25% in revenues as a result of “secondary factors and multiplier effects” to generate overall revenue neutrality. That’s a result of simple maths: 80% x 125% = 100%. As a former Progressive Democrat, I should be on Renua’s side in this debate, especially as I would favour a flat tax. But I’m afraid a 25% Laffer curve uplift does not look remotely realistic.”


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