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Aaron McKenna: A fair flat tax will save you money – and save the country

Ireland’s byzantine tax system creates perverse economic incentives that allow the super rich to exploit tax loopholes that widen social inequalities – it’s time for a simple and fair tax system, writes Aaron McKenna.

Aaron McKenna

WHAT WOULD YOU think, I wonder, if I told you that there is an alternative income tax system that the Department of Finance has said would collect the same amount of tax as today, prevent the rich from reducing their tax bills through clever accounting, and cut €2,200 off the annual tax bill of a person earning the average wage of €36,000 per year?

I am referring to a fair flat tax model that would be a radical move away from the punitive income tax system we have today, where the government is taking 52 cents out of every euro a person earns over €32,800. If you find yourself working for the government for more than half the day at some point during the year then it doesn’t take an economist to tell you that it will be damaging to the economy: all you need do is take a look at the Ireland of today, where we’re one quarter of negative growth away from slipping back into a technical recession that, in the real world, we’ve never left.

Tax increases harm the economy twice as much as spending cuts

For all the talk of austerity the government has cut its total spending from €56.4 billion in 2007 to €54.6 billion this year. It has made up the difference to close the deficit by taxing a hole through the pockets of workers in particular. Despite there being hundreds of thousands fewer people in work today, the government will collect significantly more income tax in 2013 than it did in 2007. Go figure.

Because the economic cost of a tax is a function of the tax rate squared (or, roughly, a 20 per cent tax causes four times as much economic loss as a 10 per cent tax) our extremely high marginal rates have contributed significantly to the falls in GDP, retail spending and consumer confidence among other things that have been crippling us even as exports rise. Fine Gael used to understand that, when they were promising us the earth, moon and stars in opposition. They even cited research from Harvard University that found tax increases harmed the economy twice as much as spending cuts.

The rich are allowed to pay a smaller percentage of income in tax

Yet is was the Fine Gael-run Department of Finance that released figures, when asked, as to what would be required to replace our current income tax, PRSI and Universal Social Charge take from workers if a fair flat tax model were introduced. They came back with a compelling answer: a tax free allowance of €15,000 for every worker and a flat tax rate of 27 per cent on earnings over that amount.

Work it out and that would mean a tax cut for every average Joe and Jill worker in Ireland. A person earning €20,000 would save €869 on their current tax bill of €2,219; the average household earns €55,000 and would save almost €7,000 on their tax bill of €17,700 today. Meanwhile, the rich would no longer be able to avail of clever accounting to reduce their tax bill, in a move reminiscent of the Buffet Rule in the US; which came about when the billionaire investor Warren Buffet pointed out the ludicrous logic of a tax system that allows him to pay a smaller percentage of his income to the government than his secretary has to.

(The model was raised at a recent Alternatives for Ireland meeting. The proposal was picked up confusingly as the American “Fair Tax” model of getting rid of income tax completely and replacing it with higher VAT, but what was actually being talked about was a fair flat tax. Put it down to the confusion in terminology that regularly exists between US and European politics, where a liberal in Europe is a small government conservative and a liberal in the US is a big government socialist.)

It makes sense. So, why don’t we do it?

It’s simple to understand and simple to administer, with the side benefit that you would require fewer tax collectors – or could free some more up for chasing tax dodgers – and lower the cost on businesses of managing payroll. It makes sense. So, why don’t we do it?

The fact is that politicians like complicated tax systems. The more opaque and complicated it is, the more they can sweeten the deal for select groups of voters and contributors. A byzantine tax system allows them to stick in reliefs and loopholes that benefit the rich and create perverse economic incentives, such as for property speculation (remember that?), which a flat tax system prevents. Politicians might carp on about taxing the rich, but Enda Kenny has stood on more platforms with millionaires and billionaires than he has with the average taxpayer whom he is most certainly soaking with tax.

The fair flat tax is preferable to one of these mythical wealth taxes that Shinnernomics calls for, where we’ll essentially try and raid the savings accounts of people who will simply move their money offshore. It’s complicated – you have to find the wealth, for one – and easy to avoid, versus a system of simply doing to the rich what we do to every PAYE worker: make them pay tax on what they earn in the country, as they earn it.

What about reliefs?

Of course, any astute person will point out that a fair flat tax system would abolish reliefs enjoyed by average folks. Mortgage interest relief, medical insurance relief and pension relief to name three of the biggest ones – as well as making things like child benefit taxable (as all income would be).

That’s why it wouldn’t be appropriate to simply introduce a fair flat tax overnight. Mortgage interest relief is already being wound down by successive governments; and we’re moving towards a new pension and health insurance system anyway that will change the way the reliefs work (or don’t). In the meantime, we would retain the key reliefs that help people to protect their families and plan for their futures; essentially delivering a tax cut by way of keeping the reliefs whilst lowering the marginal rate of income tax over €15,000 to 27 per cent.

Instead of being totally revenue neutral, the fair flat tax combined with retention of certain key reliefs enjoyed by ordinary people would deliver about €2 billion of a tax cut into the economy; as well as being a far more efficient tax system in every sense of the word.

As I’ve pointed out, the government has only managed to cut its spending from €56.4 billion in 2007 to €54.6 billion this year. If we’re serious in our intent to restart our domestic economy a flatter tax system that puts money back into the pockets of ordinary people is the way to go. Perhaps the government might consider moving on from the proverbial four men to hold a hose and water some plants model of spending.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.

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