Lucinda Creighton’s Renua Ireland party was first from the traps with its election manifesto. High on its agenda are plans for a 23 per cent “flat tax” on all income, which, on the face of it, would deliver big up-front benefits to many thousands of people. But can it work?

The notion is simple. The exact same tax rate is applied regardless of income. The basic idea is that this would stimulate activity by way of a huge release of money into the real economy which would lead, in turn, to job creation and the recovery in exchequer revenues foregone when the flat tax was introduced. Or so the theory goes.

Renua’s small-scale means the plan is unlikely to be implemented – but practical and fiscal questions abound.

There is, first, the matter of the amount of revenue raised. Based on 2013 returns, Renua’s calculations suggest the net overall return would drop in the first instance by between €3.5 billion and €4.5 billion. This comes after €1 billion in new revenues from the elimination of credits and exemptions. While Renua would introduce the tax over three years, it argues that the deficit, in terms of revenue foregone, would be wiped out in 12 months. This is based on “broad and dynamic” effects as set out in a report by accountants KPMG.

In Renua’s projections, the flat tax would deliver an extra €1 billion to the exchequer from tax on the likely drawdown of €4 billion in bank deposits by business owners as they seek to avail of the new rate.

Another €500 million would come in by way of increased business investment. A further €1 billion would come from increased VAT revenues and the like as workers spend more with increased disposable income. Renua also argues that another €1 billion in annual tax revenue would come in to the formal economy from the €20 billion “black” economy as the denizens of the underhand world clean up their affairs in the new regime.

Sweeping assumptions

These are sweeping assumptions. Through prolonged and painful effort, the State has just about recovered the tax-raising capacity lost in the crash. Despite all that, Renua’s plan would lead to a direct loss of revenue on the premise that it all comes back quickly via hoped-for and anticipated actions. To say the least, this is risky.

True, the party casts itself as proponent of prudence and long-term planning. While it would prohibit current budget deficits in periods of growth, its plan assumes that some “black” economy types will suddenly do the right thing.

Really?

The attractions of a flat tax for people on higher tax rates are obvious, as they would pay a good deal less. This is crucial in the Irish context in light of the relatively low income threshold (€33,800 for single people) at which the higher 40 per cent tax rate kicks in. Add in PRSI and the universal social charge and the ultimate tax rate is much higher.

Although cuts from the October budget came into force one week ago, the marginal tax rate on earnings under €70,000 is 49.5 per cent. Who on that rate wouldn’t prefer 23 per cent?

The benefit expands as income rises, but the inverse is also true. People on low incomes would pay more. In this sense flat taxes are generally seen to be “regressive”. Thus an Irish flat tax would mark a departure from the current “progressive” system, in which people generally pay more and more tax as earnings increase. Indeed, Department of Finance data suggests the Irish tax system ranks among the most progressive in the western world.

Still, the very sense that too many people pay too much tax adds a certain resonance to the Renua plan. A further dimension is that it would also take many low-earners, who don’t pay income tax right now, into the tax net.

The party would retain child benefit. To maintain basic income, it would also provide a €3,600 annual direct payment to people on the minimum wage (about €18,500 per annum based on a 39-hour week). Such payments would also be made on income between €18,500 and €70,000, declining on a pro rata basis as income rises.

For all that, there is no escaping the likelihood that people on low incomes would end up paying more tax. Note that the 23 per cent flat rate would be higher than the standard 20 per cent rate.