Thursday, 17 June 2004
Department of Finance
Question 99: To ask the Minister for Finance if he has studied the introduction of a flat rate of VAT and income tax, as introduced in Slovakia, in terms of its attractiveness to domestic and foreign investors; and the rate at which such a tax would have to be levied here to collect revenues at the rate collected by the existing tax structure. [18198/04]
I am aware of the recent tax reforms in Slovakia which are centred on the introduction of a flat rate of tax of 19% across a number of tax heads including income tax, VAT and corporation tax. The reforms include the abolition of most income tax reliefs and exemptions. While certain other taxes including gift and inheritance tax have also been abolished, the Slovakian reforms also provide for increased rates of excise duties.
The Irish tax system as it has developed, particularly over the period 1997 to date, has proven to be a successful tool in incentivising and creating employment and in attracting and retaining inward investment. The role that taxation has played in the success of the Irish economy, especially in recent years, has been widely recognised internationally. The tax policies of individual countries reflect a range of factors and democratic choices, social, economic and cultural.
For example, in the case of VAT, Ireland has three rates in contrast to the single rate now applying in Slovakia. A zero rate applies to most food, children's clothes and shoes and oral medicines; a reduced rate of 13.5% applies mainly to domestic fuels, labour intensive services and general repairs and maintenance and goods or services which are not zero rated or reduced rated are generally standard rated at 21%. To raise the same revenue by having a single rate of VAT across the whole base would allow a reduced rate for those goods currently standard rated but would involve a very significant rate of VAT on food items. Similarly, in recent years we have moved to a tax credit system and increased such credits so that the lower paid are taken out of the tax net altogether. A flat-rate income tax regime, in the absence of a specific exemption, would mean that those on very low incomes would face a tax liability where at present they do not.
Having regard to the success of the Irish tax system in contributing to our economic development, I see no reason to explore alternative models which would involve a dramatic shift from our current approach. However, purely on a technical basis, assuming abolition of the existing levels of tax allowances, credits, reliefs and exemption thresholds including the zero VAT rate, other than wear and tear allowances associated with the use of capital assets in a trade or profession, it is tentatively estimated that to maintain the current yield to the Exchequer from VAT and income tax combined would require the imposition of a single flat rate of the order of 17% across both taxes.