Comment & Debate
“Flat Tax: What Would It Do For Ireland?”. Business and Finance Magazine. 5 May 2005 – elimination of loopholes in the tax code will reduce the marginal benefits of tax evasion for Ireland’s wealthiest 5%, bringing their income into the tax base. This means that, assuming a 25% flat rate tax on all income with a standard zero-tax deduction of Eur20,000 (scenario one), the overall tax burden will shift right. This means that relative to the current status quo, the peak tax liability will no longer fall on to Ireland’s middle-class families, but will be shouldered predominantly by the highincome earners with personal income in excess of Eur80,000.
This effect is similar to the experience of the income tax cuts in the UK and the US in the 1980s. If before the tax cuts, the top 10% of UK earners contributed only 32% of income tax revenue, after the changes in the tax rates, the group’s contributions increased to 45%. In Alberta, Canada, following the provincial government adoption of flat rate taxation, the overall budgetary contributions from the top 15% of earners increased from 62% in 2000 to 67% in 2004. Importantly, low-income workers enjoyed significant relief: in 2000 the bottom 50% of wage earners paid 3% of the provincial tax burden while by 2004, this figure fell to 1.5%.
This also implies that, with an enlarged tax base, Ireland’s fiscal position can only improve under the initially revenue-neutral flat rate, once the benefits of growth and savings from compliance costs are factored in. Under scenario one (see chart), the expected benefits in revenue enhancement can reach between 0.07% and 0.2% of GDP in the year following the reform. These benefits will be further augmented by higher labour force participation rates and returns to entrepreneurial risk-taking that are encouraged by the flat tax system.
In the Russian case, the combined effects of flat tax introduction amounted to an over 50% increase in government revenue and nearly a quarter of the growth in GDP. The same happened in Estonia and Slovakia. Among the economies more similar to Ireland, the UK Channel Islands and Hong Kong provide strong evidence as to the long-run effects of the flat rate taxation of personal income.
Matthew Krieger. “Lack of competitive tax system costs foreign investment, study finds”. The Jerusalem Post. 6 Nov. 2007 – According to the report when Russia instituted a flat-tax system about seven years ago revenue from personal income tax rose 25.2 percent in 2001 and 24.6% in 2002 an increase of 56% in two years while Lithuania enjoyed a 182% increase in tax income over the first two years after introducing a flat-tax. Meanwhile the GDP growth rate of the countries examined in the report rose an average of 8.45% in the two years following the implementation of the reforms.
“If Israel were to enjoy similar success as Russia we might say that such an effect would mean an increase of NIS 55 billion in state income from direct taxes and GDP growth of 13.55% by 2009 noted Shlush.
Additionally, in 1998, when compliance costs were last calculated, the Israeli government collected NIS 64 billion in taxes, while compliance costs reached NIS 31.5b., equaling 7.67% of the GDP at the time.
Compliance costs take into account the time spent in accounting, reporting, audits, appeals and negotiations with the tax authorities.
It cannot be that a tax system which throws away half of what it collects is the best that it can be Shlush said.