Steps to make our tax system more equitable

IN THE next few weeks a large number of organisations will be announcing they have produced their “pre-budget submissions”.

The submissions are usually a discussion of what the Government should do, from the perspective of particular vested interests.

They are pretty much too late. The comprehensive spending review of the departments has been done, and the Government does not make its decisions on the broad scope of policy in the last couple of weeks before the budget. In any case, the Government is no longer in charge of anything other than the tactical implementation of an overall strategy dictated to us by the Troika.

In that spirit I would like to make my own pre-budget submission on the basis of three proposed changes to the tax system. These would radically simplify and expand the tax system, providing an impression of a greater sense of fairness.

Firstly, I would urge Government to do a top to bottom reform of the income tax system. Income tax here I take to include not just the actual PAYE system, but all the various barnacle-like crustaceans that have latched onto it. We have a universal social charge, we have pay-related social insurance charge, we will no doubt have other forms of charges over the years as the Government scrambles to find extra money.

My proposal is to replace all of this with a flat tax where, after a certain minimum tax-free allowance, all income — regardless of source — is taxed as a single rate. Of course this would have to be introduced along with the radical reduction in the amount and extent of tax-free allowances.

The most comprehensive study conducted on tax-free allowances by members of the commission of taxation suggested that approximately €11 billion per annum in tax shelters was available.

Opponents of flat taxes critique that they’re not progressive. But of course they are progressive. If you earn more money you pay more tax. What critics, it seems to me, actually mean is that taxes are not progressive in rates, in that higher earners are not paying a higher proportion of their marginal earnings. Why this would be a desirable thing has never been explained to me.

One issue with flat taxes is they can increase income inequality. This can be overcome by having a higher personal tax credit. This credit could be as much as €20,000 or more, allowing people to earn that much money before paying a single penny in tax.

My second proposal is that we extend liability for tax to all persons who hold an Irish citizenship. Citizenship is not a one-way street. It contains both benefits and costs. I’m sure I’m not the only person who finds it faintly nauseating when billionaire tax exiles, Irish citizens, descend upon us and tell us how we should run the country.

Like the US, Ireland has a very extensive series of dual tax treaties. Therefore tax paid in one jurisdiction, Let’s say for example Portugal, can be written off against any Irish tax liability. If people don’t want to pay they can of course surrender their Irish passport.

The third proposal would be to adopt an open tax return policy. In Norway, while the details of tax returns of individuals are not made available, the bottom line income in tax paid (crucially this is limited to tax paid in Norway) is disclosed for each taxpayer.

This fosters a sense that everybody is in the system, and the system is for everybody. It also, one imagines, makes it that much more difficult for people to plead the poor mouth.

Combined with the second approach, the reporting of worldwide tax liabilities, this would provide a much greater sense of the true nature and distribution of Irish incomes and taxes.

Brian M Lucey is Professor of Finance,

School of Business Studies, Trinity College

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