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The Case For Flat Tax In Ireland
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I'm not particularly committed to retaining it; I'm just suspicious of magic solutions that appear to fix it with great simplicity and no cost. I quite like the idea of a negative income tax replacing social welfare, but I think if it's to be cost neutral and to have a "pivot" at 30k then the tax rate above 30k has to be significantly higher than 40%. And since lower tax rates on higher earners seems to be the main attraction of your proposal I think that's a problem.
Maybe we fix that by chosing different positive and negative tax rates, or a different pivot, or both. An interesting exercise would be to try to devise a system which would overall be cost neutral and then to investigate who would be the winners, and who the losers, under such a system.0 -
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Fine - as I said, I took some time to come up with the OP and when I realised that universal income would not work, I did a quick run on negative income tax. When I have an opportunity I will study those numbers more closely. At first glance, I do not agree though with the contention that there will be any significant number of people who are worse off under the mooted flat tax / negative income tax system.Peregrinus wrote: »I'm not particularly committed to retaining it; I'm just suspicious of magic solutions that appear to fix it with great simplicity and no cost. I quite like the idea of a negative income tax replacing social welfare, but I think if it's to be cost neutral and to have a "pivot" at 30k then the tax rate above 30k has to be significantly higher than 40%. And since lower tax rates on higher earners seems to be the main attraction of your proposal I think that's a problem.
Maybe we fix that by chosing different positive and negative tax rates, or a different pivot, or both. An interesting exercise would be to try to devise a system which would overall be cost neutral and then to investigate who would be the winners, and who the losers, under such a system.0 -
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Given each of those people would get €12,000/year, without child benefit they would have a household income of €24,000/year under the mooted system.draiochtanois wrote: »This post has been deleted.0 -
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draiochtanois wrote: »This post has been deleted.
Link the abolition of child benefit to direct provision of school books, after-school care for working parents, second year of pre-school etc. and you create an incentive to work.0 -
Just stumbles on these OP, which you may or may not have seen.
My local independant TD posting applauding Unite having a bash at Renua's proposals for a flat tax "Renewa's Canival Ride Back to Boom-and-Bust"
Personally, seeing Unite coming out against it makes me think its worth having a closer look at.
Bruton is for it too, but only for foreign emigrants and folks returning from abroad. Bruton wants 30pc emigrant tax to 'lure highly skilled back to Ireland'
Cant really see that working on equality grounds, but it does give some hope that they are actually waking up to the huge shortage of qualified/skilled & experienced personnel many industries are facing in the country and the huge detrimental effect it is going to have on the economy.
“Follow the trend lines, not the headlines,”
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Overall, on Greyian's figures, it's more or less line ball - there'll be some winners and some losers, but the gross amount of income redistributed is about 20bn under both systems.FreudianSlippers wrote: »Fine - as I said, I took some time to come up with the OP and when I realised that universal income would not work, I did a quick run on negative income tax. When I have an opportunity I will study those numbers more closely. At first glance, I do not agree though with the contention that there will be any significant number of people who are worse off under the mooted flat tax / negative income tax system.
As I say, I think Greyian's figures underestimate the true cost, so the the negative income tax will redistribute more income than the current SW system does. That calls into question the affordability of the scheme, but it does probably reduce the number of losers in the change.
But I do expect that there will be losers. What you are essentially proposing is to abolish most SW allowances, entitlement to which depends on a variety of personal circumstances, insurance contributions, etc, and replace them with a negative income tax, entitlement to which depends simply on how much you earn. The big losers in this will be people currently receiving insured benefits who also have other earnings, of whom retirees who also have private savings or employer-sponsored pension schemes or both are likely to form a large part. The other big losers will be people who currently qualify for benefits on any grounds other than low income - boardies have already mentioned the recipients of children's allowances.
You can argue that we should withdraw benefits from pensioners who have private savings or a pension from their jobs, or from workers with children and an income too high to benefit under the negative income tax. But at the very least we have to identify those (and other) groups as losers. And we can expect resistance from them and their families.
A couple of other thoughts occur to me:
1. Your system is crude. You propose a uniform "pivot" (currently 30k) for all taxpayers, regardless of circumstances - the pivot pays no attention, for example, to how many dependents a taxpayer has, whether they live alone or in a household with other adults, whether they have a disabilitym and therefore it's not related to any assessment of what someone in their situation needs to avoid being in poverty. You do propose to retain a number of circumstance-related SW benefits (e.g. disability benefit) which will partly ameliorate the effects of this, but overall your system is going to be much less responsive to individual circumstances than the current SW system is. That may be a good thing or a bad thing, but it's at least a thing whose policy implications need to be considered.
2. There's a transitional problem; where people have already paid social insurance contributions, they can argue strongly that this is a done deal; you cannot withdraw the entitlement that they have already secured through their SI contributions. So there may be a long transitional period when, out of political expediency and/or the demands of justice, you have to continue paying insured benefits to people who have already paid the contributions which secure them.
3 And there's also a funding issue; if you are withdrawing most or all insured benefits, then logically you have to stop collecting the PRSI contributions which fund them and give entitlement to them. So the cost of your system is not only the reduced income tax take, but also the reduction or abolition of social insurance contributions. That needs to be factored in.0 -
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Again, my argument would be that even if the exchequer breaks even, having more disposable income in the pockets of the vast majority of the country would be better as it would increase indirect taxation figures.Peregrinus wrote: »Overall, on Greyian's figures, it's more or less line ball - there'll be some winners and some losers, but the gross amount of income redistributed is about 20bn under both systems.
As I say, I think Greyian's figures underestimate the true cost, so the the negative income tax will redistribute more income than the current SW system does. That calls into question the affordability of the scheme, but it does probably reduce the number of losers in the change.
But I do expect that there will be losers. What you are essentially proposing is to abolish most SW allowances, entitlement to which depends on a variety of personal circumstances, insurance contributions, etc, and replace them with a negative income tax, entitlement to which depends simply on how much you earn. The big losers in this will be people currently receiving insured benefits who also have other earnings, of whom retirees who also have private savings or employer-sponsored pension schemes or both are likely to form a large part. The other big losers will be people who currently qualify for benefits on any grounds other than low income - boardies have already mentioned the recipients of children's allowances.
Firstly, I never said we should abolish private savings or pensions - that's a ridiculous proposition!You can argue that we should withdraw benefits from pensioners who have private savings or a pension from their jobs, or from workers with children and an income too high to benefit under the negative income tax. But at the very least we have to identify those (and other) groups as losers. And we can expect resistance from them and their families.
Secondly, I still argue there are very few losers under the system of flat tax and negative income tax. It has been identified that potentially people with no income and a number of children in excess of 3 could potentially lose out - however, I would argue that these people are excessively remunerated under the present system and they are not losing out on a significant amount of money. The proposed system encourages these people to obtain some level of part-time employment; given if they earned even €10k/year gross, they would be significantly better off than they would be under the present system.
I welcome calculations as to how it could work and systems which you feel should be incorporated rather than sheer dismissal - I don't believe it is the most constructive form of discussion.A couple of other thoughts occur to me:
1. Your system is crude. You propose a uniform "pivot" (currently 30k) for all taxpayers, regardless of circumstances - the pivot pays no attention, for example, to how many dependents a taxpayer has, whether they live alone or in a household with other adults, whether they have a disabilitym and therefore it's not related to any assessment of what someone in their situation needs to avoid being in poverty. You do propose to retain a number of circumstance-related SW benefits (e.g. disability benefit) which will partly ameliorate the effects of this, but overall your system is going to be much less responsive to individual circumstances than the current SW system is. That may be a good thing or a bad thing, but it's at least a thing whose policy implications need to be considered.
Firstly, the system is based fully on individuals - I would argue that credits simply for being married are archaic.
Secondly, I have clearly indicated that the present level of disability allowance (and other similar allowances) would remain. I do not understand how this could be said to have not been calculated in? Unless you are arguing that there are people benefiting from social welfare payments (which are lower than proposed under this system) - the argument doesn't make sense; perhaps a specific example would clarify your point, but at present it doesn't make sense to me.
There may certainly be an argument for contributory social insurance going forward, but this would be optional and above the proposed system. However, it is worth noting that is not how SW works at present, one does not pay into a system for future savings; it goes to paying current recipients. It would be a difficult argument for people to make to say they should continue on their lower amounts of SW when they are in the vast majority of cases going to be given more money.2. There's a transitional problem; where people have already paid social insurance contributions, they can argue strongly that this is a done deal; you cannot withdraw the entitlement that they have already secured through their SI contributions. So there may be a long transitional period when, out of political expediency and/or the demands of justice, you have to continue paying insured benefits to people who have already paid the contributions which secure them.
If you're referring to employers' contribution, I don't see why you would not be able to implement a flat employers contribution tax per employee which could be distributed via the negative taxation pool to those who are recipients of same.3 And there's also a funding issue; if you are withdrawing most or all insured benefits, then logically you have to stop collecting the PRSI contributions which fund them and give entitlement to them. So the cost of your system is not only the reduced income tax take, but also the reduction or abolition of social insurance contributions. That needs to be factored in.
For personal contributions, this obviously is again covered by the negative tax; entitlements retained which are not could easily be distributed by other existing departments (particularly HSE).0 -
Maybe I'm missing something, but I don't see how scrapping the SW and giving a negative tax doesn't do this?draiochtanois wrote: »This post has been deleted.0 -
FreudianSlippers wrote: »Again, my argument would be that even if the exchequer breaks even, having more disposable income in the pockets of the vast majority of the country would be better as it would increase indirect taxation figures.
That doesn't really compute. We've shown that the overall expense of the system will be similar to the existing system. For the exchequer to break even, that means that the tax take from the new system is going to have to be very similar to the existing system.
So we're going to have to take the same amount of money off people, yet we will somehow also have "more disposable income in the pockets of the vast majority of the country". That simply cannot be. You cannot take the same amount of money off people, yet somehow also having them with increased disposable income.
If anything, this proposition (which really needs to be re-costed) is going to cost higher-income earners more than the existing system.
Currently, you say we have 775,000 people unemployed/receiving pensions. Under your system, we're going to have to support those people and anyone earning under €30,000. This means our tax take from those earning €30,000 or less is going to be lower than the current system (we'll actually be paying money out to these people, instead of collecting taxes from them). If the tax take on those earning €30,000 or less is lower, and the overall amount of tax we have to take in has to stay broadly in line with current income tax receipts, the only way that is possible is to make the tax rate on people earning €30,000+ is for them to pay higher taxes than they currently are. You can't lower taxes for those under €30,000, and lower taxes for those over €30,000, and somehow end up with more tax income. It's impossible.0 -
If the Exchequer breaks even - i.e. if the negative income tax pays out more or less what the abolished SW benefits pay out - then there won’t be “more disposable income in the pockets of the vast majority of the country”. The total amount of disposable income in the nations pockets will be the same. Some individuals will have more; other less. If there is a small number of losers who lose relatively large amounts and a large number of winners who win relatively small amount then it will be true to say that the majority have more money. But I don’t see how that will improve indirect tax receipts, since the amount they spend will be fully offset by the amount the losers stop spending.FreudianSlippers wrote: »Again, my argument would be that even if the exchequer breaks even, having more disposable income in the pockets of the vast majority of the country would be better as it would increase indirect taxation figures.
You misunderstand me (and perhaps I have badly expressed myself). I do not think you are suggesting abolishing private savings or pensions. I am just pointing out that there are large numbers of people receiving the insured retirement pension who also have private savings and pensions. Depending on how much private savings and pensions they have they may get less, or nothing , under a negative income tax. Unless you keep paying their benefits - which I discuss below - they are significant losers under your system. And there are a lot of them. And they (and their adult children) are a fairly politically influential class.FreudianSlippers wrote: »Firstly, I never said we should abolish private savings or pensions - that's a ridiculous proposition!
I’m not trying to be dismissive; I’m trying to be constructive, suggesting directions in which your system could be improved. The problem is that the current SW system is responsive to a variety of needs, whereas your negative income tax is responsive only to having an income below an apparently arbitrary level - a level which, for a single individual with no dependents may be quite generous but for someone differently situated may not be generous at all. You could possibly address this by having a pivot which is responsive to personal circumstances - a higher pivot if you have dependants or a disability, a lower pivot if you have none of these things, or if you have access to significant capital (we want to encourage people to use their capital productively, don’t we?). Basically, any factor which is currently taken into account in determining entitlement to any SW benefit, you could at least consider whether it is socially desirable to take that factor into account in determining an individual’s pivot point in the negative income tax system.FreudianSlippers wrote: »I welcome calculations as to how it could work and systems which you feel should be incorporated rather than sheer dismissal - I don't believe it is the most constructive form of discussion.
See, I think this is a problem. If the negative income tax side of your arrangement is an attempt to alleviate poverty, then I don’t think you can ignore the fact that whether people are in poverty or not depends on more than the level of their income; it depends on the demands made on their income. Being married may not, in itself, mean very much, but being in a stable conjugal arrangement definitely makes your income stretch further, so that’s relevant to assessing what’s a poverty-level income for married couples or cohabitees versus singletons. Whether you have dependants is another factor - the more dependents you have, the higher the level of income needed to keep you and your dependents out of poverty. I don’t think it’s either efficient or realistic to try to frame policy for ensuring a decent basic minimum standard of living for people which ignores the circumstances in which they live.FreudianSlippers wrote: »Firstly, the system is based fully on individuals - I would argue that credits simply for being married are archaic.
Sorry, I’m not putting my point very well. The bottom line is that if you are distributing the same 20bn or so but allocating it differently, it is inevitable that there will be winners and losers. Therefore we can say with confidence that you are proposing to reduce the incomes of some people, even before we have identified those people. And I think it’s fair to say that if you’re advancing a proposal to reduce their income, the onus really is on you to identify who they are and to satisfy us that reducing their income is fair and is good policy. My concerns aren’t adressed merely because I can’t point to the individuals who will lose out. I can be certain that there are such individuals, and that’s enough.FreudianSlippers wrote: »Secondly, I have clearly indicated that the present level of disability allowance (and other similar allowances) would remain. I do not understand how this could be said to have not been calculated in? Unless you are arguing that there are people benefiting from social welfare payments (which are lower than proposed under this system) - the argument doesn't make sense; perhaps a specific example would clarify your point, but at present it doesn't make sense to me.
(As it happens, I think I have identified at least some of those whose income will be reduced - those in receipt of non-means-tested benefits, some of whom will have incomes in excess (and possibly well in excess) of 12k, and some of whom may indeed have incomes in excess of 30k.)
Yes, I know. That’s my point. People already in receipt of contributory old age pensions or just about to qualify for them will argue that you have to keep paying them regardless of their other income, because they have earned them with the contributions they paid in previous decades. But in order to keep paying them, are you going to keep collecting PRSI contributions from current workers? That won’t be acceptable unless you’re promising them, too, a contributory old age pension in years to come. Assuming you don’t want to do that, there’lll be a transitional period (of several decades) during which you have to pay social insurance benefits already earned by contributions paid in the years up to 2015 and you’re going to have to fund that out of general taxation, because you won’t have PRSI contributions any more.FreudianSlippers wrote: »There may certainly be an argument for contributory social insurance going forward, but this would be optional and above the proposed system. However, it is worth noting that is not how SW works at present, one does not pay into a system for future savings; it goes to paying current recipients.
OK, you can offset it against any amount which people would get under the negative income tax, but because these benefits are not means-tested a fair chunk of them are payable to people who will get not very much, or nothing at all, under the negative income tax.
So I think think there will still be a largish insured benefit liablity that you will have to meet, with no PRSI contribution stream to meet it.
So, all other things being equal, this is going to require you to increase your tax receipts from those who earn over 30k over and above the tax receipts you are currently getting (or find some other source of revenue to pay accrued social insurance obligations).0 -
In that case they'd probably be in receipt of some not insignificant housing payment too, which would need to be added. Whether those payments are justified is another matter.draiochtanois wrote: »This post has been deleted.
I generally like the idea of welfare recipients getting x and being told to make do. It is, at the end of the day exactly what those receiving no welfare payments have to do. You get your fixed salary each month and have to live within it, even if the boiler breaks down or the kids need new shoes. I don't have a problem at all with applying the same principle to welfare payments. However as I said above, some special cases do have to be considered (severe disability of a child would be one-both tax system and/or welfare system has to help people coping with such things IMO).
Eliminating all the little loopholes and whatnot would guarantee to reduce fraud as well, as there would be nothing to defraud (or less, at least). This goes for both the tax and welfare systems. Simplifying these structures brings this side benefit.0 -
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FreudianSlippers wrote: »I don't see how one could arrive at that conclusion given:
A person making €10,000 would receive €8,000 = €18k/p.a. after tax
A person making €20,000 would receive €4,000 = € 24k/p.a. after tax
A person making €30,000 would receive €0 and pay €0 tax = €30k/p.a. after tax
These people are all manifestly better off on this system than they currently are with child benefit.
If an employer pays an employee €10,000 per annum. What's the incentive for the employer to give them a 10% pay rise? If, regardless, the money is going to come from the state? Surely this scheme incentives lowering wages of small firms because €12,000 is guaranteed from the state anyway? If there a solution to this problem?0 -
Even though I am not a high earner, I have always been of the view that a flat rate of tax is fundamentally more fair than more than one tax band. One thing I do have an issue with is civil servants/public sector people being paid high salaries. That is stealing. Civil servants should not jealously seek parity of pay with the captains of industry because real world people do a lot of good for this country whereas civil servants are akin to the nobles in the court of Louis VIX.0
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If an employer pays an employee €10,000 per annum. What's the incentive for the employer to give them a 10% pay rise? If, regardless, the money is going to come from the state? Surely this scheme incentives lowering wages of small firms because €12,000 is guaranteed from the state anyway? If there a solution to this problem?
If the employer pays a salary of €10,000 then, under the proposed scheme, the worker's total income is €10,000 + ((€30,000-€10,000) x 40%) = €18,000.
If the employer raises the salary to €11,000 the the worker's total income becomes €11,000 + ((€30,000-€11,000) x 40%) = €18,600.
In other words, of the extra €1,000, €600 ends up in the worker's pocket and the other €400 flows to the state as a reduction in negative income tax payments. It's an effective tax rate of 40%, in other words. And you might say that's a pretty hefty tax rate to apply to somebody who's on a pretty thin income to start with.
But that's how a flat tax works. Everybody pays tax at the same rate. If you don't think that's a good idea then, basically, the scheme we are discussing is holed below the waterline.0 -
I want to take you at face value as being genuine, but this is either lacking in reality or disingenuous right?Peregrinus wrote: »
If the employer raises the salary to €11,000 the the worker's total income becomes €11,000 + ((€30,000-€11,000) x 40%) = €18,600.
In other words, of the extra €1,000, €600 ends up in the worker's pocket and the other €400 flows to the state as a reduction in negative income tax payments. It's an effective tax rate of 40%, in other words. And you might say that's a pretty hefty tax rate to apply to somebody who's on a pretty thin income to start with.
Although the extra €1,000 is being taxed at 40%, the worker on €11,000 is still benefiting from the negative taxation and is therefore only €7,600 better off as opposed to being €8,000 better off.
Either way, it's hardly unfair to the employee being given money!0 -
I'm not saying it's unfair. I'm saying it's an effective marginal tax rate of 40% being applied to a low earner and if somebody thinks that's unfair then that somebody will not favour a flat tax.0
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That's simply not correct; it is a -31% income tax being applied to a worker on €11k gross.Peregrinus wrote: »I'm not saying it's unfair. I'm saying it's an effective marginal tax rate of 40% being applied to a low earner and if somebody thinks that's unfair then that somebody will not favour a flat tax.0 -
The marginal rate of tax is effectively 40%. He gets an extra 1,000, but his take-home goes up by 600.0
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That's disingenuous. The effective marginal tax rate is -31%.Peregrinus wrote: »The marginal rate of tax is effectively 40%. He gets an extra 1,000, but his take-home goes up by 600.
Under the current system, an increase from €10k to €11k means you are €1k better off as your take-home pay is respectively €10k / €11k.
Under the proposed system, technically the increase from €10k to €11k nets you an extra €600/year, but your take-home pay is respectively €18k / €18.6k.
Are you seriously arguing that the person is at a disadvantage compared to the current system? I know I'd rather have €18,600 in my pocket every year after tax than €11,000. Under the proposed system, the person on €11k gross is €7,600 better off than they would be - it's almost ludicrous that someone would complain about the fact that they pay a higher "marginal" tax (technically I suppose there is no true marginal tax under a flat tax system) when their EMTR is still net negative.0 -
FS, I have never said that the person on 10k would be worse off under your system. I have said that the person on 10k under your system who gets a 1k increase pays an effective marginal rate of tax of 40%. That's unsurprising and I would have thought uncontroversial; you have billed your proposed system as a flat tax system, and pretty much the defining condition of a flat tax system is that the same marginal rate is paid at all points. The taxpayer whose income goes up from 10k to 11k should pay the same marinal rate as the taxpayer whose income goes up from 110k to 111k. Is that not exactly what you are aiming for?
As for whether the person on 10k under your system is better off than the person on 10k under the present system, that depends. Your comparison takes account of the negative income tax that would be paid under your system, but ignores all social welfare supports that would or might be paid under the present system. To know whether he would be better off under your system we'd need to know more about his situation and entitlements under the present system.
In the right circumstances it might be that he would be better off under your system than under the present system. That doesn't change the fact, though, that under your system he would pay a marginal rate of 40% - i.e. for every extra euro he earned, his net income would go up by 60 cents.0 -
When viewed in isolation of the negative tax I would agree, but I don't think one can do that because marginal is irrelevant; effective marginal is relevant.Peregrinus wrote: »FS, I have never said that the person on 10k would be worse off under your system. I have said that the person on 10k under your system who gets a 1k increase pays an effective marginal rate of tax of 40%. That's unsurprising and I would have thought uncontroversial; you have billed your proposed system as a flat tax system, and pretty much the defining condition of a flat tax system is that the same marginal rate is paid at all points. The taxpayer whose income goes up from 10k to 11k should pay the same marinal rate as the taxpayer whose income goes up from 110k to 111k. Is that not exactly what you are aiming for?
I've addressed this on a few occasions now and other than a 2-adult household with over 3 children on no income, this has not proven to be correct.As for whether the person on 10k under your system is better off than the person on 10k under the present system, that depends. Your comparison takes account of the negative income tax that would be paid under your system, but ignores all social welfare supports that would or might be paid under the present system. To know whether he would be better off under your system we'd need to know more about his situation and entitlements under the present system.
I totally welcome evidence of people who would be worse off and finding ways to either justify making them worse off or financing a way to ensure they are not worse off. But hypothetical people (excluding the aforementioned) is all we have at the moment.
I think we're going around in circles here particularly given this is a moot conversation as it will never happen - but as I have said, the effective marginal tax rate with the flat tax and negative income tax is -31%.In the right circumstances it might be that he would be better off under your system than under the present system. That doesn't change the fact, though, that under your system he would pay a marginal rate of 40% - i.e. for every extra euro he earned, his net income would go up by 60 cents.0 -
Can you show me the calculation on that? I don't see where you're getting, or how it's anything other than 40%.FreudianSlippers wrote: »I think we're going around in circles here particularly given this is a moot conversation as it will never happen - but as I have said, the effective marginal tax rate with the flat tax and negative income tax is -31%.0 -
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€11,000 gross to €18,600 (for lack of a better word) net is a -41% tax (apologies for the error of -31% earlier).Peregrinus wrote: »Can you show me the calculation on that? I don't see where you're getting, or how it's anything other than 40%.
I don't see how it can be anything other than that percentage as you net more money than you grossed?0
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