Dáil Éireann Debate, Thursday - 12 November 2015
68. Deputy Eric Byrne asked the Minister for Finance if he is aware of any jurisdictions that have abolished all tax credits; if there is analysis available as to the economic and social impact of such a move; and if he will make a statement on the matter. [39823/15]
View answer69. Deputy Eric Byrne asked the Minister for Finance if he is aware of any jurisdictions that have introduced a flat tax rate of 23%; if there is analysis available as to the economic and social impact of flat taxes; and if he will make a statement on the matter. [39824/15]
View answerI propose to take Questions Nos. 68 and 69 together.
I understand that Latvia has a flat income tax rate of 23% with effect from 2015 for certain types of income, while also having a State Social Insurance Mandatory Contributions system. I am not aware of any jurisdictions that have abolished all tax credits. Furthermore, I am not aware of any analysis of the economic and social impacts of these specific measures. However the Deputy may be interested in researching further the tax systems in Latvia, Estonia and Hungary, as these all involve a flat tax element.
It should however be noted that the abolition of tax credits, depending on what tax system remained, would be likely to have a negative impact for low-income earners. Tax credits can be used to shelter tax liabilities from the first unit of taxable income and therefore, depending on their value, can allow low-income earners to significantly reduce their tax liabilities.
With regard to the impact of a move to a flat rate tax of 23%, my officials have estimated that, in the context of the Irish tax system this would have a negative impact on progressivity.
A progressive income tax system means that those on higher incomes pay proportionately higher rates of tax on their income than those on lower incomes. The European Commission compares progressivity of income tax by taking the OECD tax wedge for an individual earning 167% of the average wage and dividing it by the tax wedge for an individual earning 67% of the average wage.
My officials have estimated that the replacement of the Irish income tax and universal social charge systems with a flat income tax rate of 23%, would result in the OECD progressivity measure for Ireland falling from its 2014 calculation of 1.79 to 1. In terms of Ireland's OECD ranking on this progressivity measure, Ireland would move from 2nd highest in the OECD in 2014 to the bottom of the rankings, to share that position jointly with Hungary.
