Slugging it out on tax in the Battle of the Billions

FIANNA FAIL has launched "Round Two" in the election tax contest, a bout which will run to polling day. Expect a few low punches over the coming weeks as the parties question each other's costings and strategy.

The Fianna Fail plan offers a mix of general tax reductions with a few specific measures aimed at key areas of the electorate. It involves spending roughly the same as Fine Gael intends £1.5 billion over five years - although Fianna Fail is hopeful that tight spending control, strong growth and buoyant revenues might allow this figure to rise to £1.8 billion.

But the gains are spread differently. Fianna Fail's goal of moving eventually to two rates of 20 per cent and 43 per cent offers more to higher earners in the long term. For example, looking at single taxpayers, those on around £20,000 would gain most as a proportion or their income, while higher earners would also gain substantially. The Fine Gael proposal, by contrast, offers the highest proportional gains to those on around £15,000 a year.

Most of Fianna Fail's spending on tax reductions will go towards two areas. Firstly, the party proposes to widen the standard rate income tax band to ensure fewer people pay at the higher rate.

Secondly, it proposes to introduce a lower 20 per cent income tax rate which would apply to the first £2,000 of income for single workers and £4,000 for a married couple. The plan is then to move the standard 26 per cent rate down towards 20 per cent, although Fianna Fail is not giving a firm commitment that reaching 20 per cent could be afforded within five years.

The idea of introducing the new 20 per cent rate is twofold. Fianna Fail wants to give a break to young people entering the workforce for the first time at relatively low wage levels. The gain from the new rate to all taxpayers would be around £120 a year, but obviously this would be worth much more to a young person earning £9,000 than it would be to someone on £20,000.

Fianna Fail's other "vote getter" is aimed at couples with children. It offers a £2,000 tax allowance against either the cost of a childminder, where both partners are working, or, if one spouse remains at home, the same allowance payable to the spouse who remains at home. In cash terms, this would be worth about £520 a year, or £10 a week.

Looking at the overall Fianna Fail package, it is clearly not far out of line with the Progressive Democrats. Both parties plan major reductions in tax rates and a widening of the standard rate income tax band.

The PDs have also promised to gradually phase out employee PRSI and the 2.25 per cent health and employment levies, partly paid for by a replacement of the current tax allowances with tax credits. Replacing allowances with credits would mean that the value of the PAYE tax allowance to higher rate taxpayers would gradually fall, so restricting the gains for higher earners from the reduction in the top rate to 40 per cent.

The reductions in tax rates planned by Fianna Fail and the PDs mean their tax proposals would have a different overall impact from the Fine Gael plan and what Labour and Democratic Left are expected to offer. The Fine Gael package is targeted more towards those on average incomes of around £10,000 over the five years in government, while also offering substantial enough gains to higher earners. The Fianna Fail goal to move eventually to a system of two rates - 20 per cent and 43 per cent - and widen the standard rate band offers the greatest benefit to those earning above average incomes of around £20,000 for a single person.

So the election debate on tax looks likely to centre on three areas. Firstly, there are already signs the Coalition parties are attacking Fianna Fail and the PDs on the basis that the Opposition's plans favour higher earners at the expense of the mass of workers. In fact, both the Fianna Fail and Fine Gael plans offer more in cash terms to higher earners. Where they differ is that Fianna Fail offers proportionately more - in other words more as a percentage of total income - to higher earners, while Fine Gael's fire is concentrated around average earnings.

Secondly, there will be fierce debate about the cost of the various plans. The cost of the PDs plans and the revenue it plans to raise from introducing tax credits look likely to feature in this debate.

And finally, and crucially, the debate will focus on who can deliver. Bringing in tax reductions means controlling spending. The Achilles heel of the outgoing Coalition is that it has only afforded limited tax reductions because it has allowed spending to rise ahead of target.

The Fianna Fail leader, Mr Bertie Ahern, made a strong presentation yesterday on public spending, arguing that in government his party would restrict the growth in spending to 4 per cent - which would work out at about 2 per cent in real terms. The Coalition counters that, in government, Fianna Fail and the PDs also presided over substantial public spending increases.

So who can deliver on controlling spending and what this will mean in terms of public services will be a major issue.

Fianna Fail and the PDs will find their tax plans easier to sell. The outgoing Coalition, meanwhile, may find it hard to get across the idea of reducing the total tax take on income, although it will argue that, in the end, this is what matters to taxpayers. And the voters will make up their own minds, not on the basis of the nitty gritty, but on which combination they believe can deliver.