Tuesday, 10 July 2012

Bathing the rich

Michael Taft: Okay, so you’re not one of those who believe in soaking the rich. But what about bathing? A good bath is healthy for the body and the mind. And the economy. There are a number of arguments for increasing taxation on high incomes: that low-average income earners can’t afford to pay more; that there’ s a lot money to be gained; that it is less damaging to domestic demand; and that it is part of a general egalitarian and solidarity strategy. All these work – though there is always a debate over degrees.

What is not debatable is that inequality is accelerating in Ireland. In the run-up to Budget 2013 there are political choices to make. Let’s be clear: our rich are richer than the rich in other European countries. And we’re in recession. And we’re in bail-out.

Let’s take a tour through some data on high-income groups, how much they make, how much tax they pay. Let’s see if there is an argument for Budget 2013 to disproportionately impact on the highest earners.

1. Share of Income

How much share of the income pie do high income groups take? And how does it compare to other EU countries? All figures are taken from Eurostat. Statistical note: this refers to ‘equivalised income’. This is an artificial measurement that factors in the number of people in a household. For example: you might have two households with the same amount of income. However, there are more people in the second household which means that individually they have less income. ‘Equivalised income’ takes account of this.

As seen, high income groups in Ireland take a larger share of equivalised income than in other EU countries. The top Irish 1 percent takes over 6 percent of total income here. Throughout Europe, the top 1 percent take less – 4.6 percent; while in more egalitarian Sweden, the elite 1 percent takes only 3.7 percent of total income there.

The story is similar for the top Irish 5 percent and 10 percent. Our high income groups take up more of the national income pie than their counterparts throughout the EU-15.

To put this in perspective, the top 10 percent in Ireland take in almost as much income as the lowest half of the entire population. The lowest half takes in less than 28 percent, while the top 10 percent takes in 26.6 percent.

In short, our high income groups take more from the economy than high income groups of any other EU-15 country.

2. Levels of Income

What does this mean in income terms? Eurostat provides some insight but, again, here are some stat notes. First, it only provides the minimum and maximum income per decile. For instance, in Ireland the middle 5th decile household averages €31,565 in Disposable income. The range of Gross income in this 5th decile goes from €30,361 to €37,467. So an income of €30,361 is the starting income for the 5th decile.

Second, the following figures, again, refer to the artificial equivalised income.

So let’s look at the starting income for high income groups. What is the minimum income you need to get into this exclusive company?

In Ireland, the minimum equivalised income needed to get into the elite 1 percent is €98,000. In other EU-15 countries it is €67,000 while in Sweden, it is nearly half that of Ireland - €50,200. In other words, our elite 1 percent pull receive a lot more money than their elite EU counterparts.
Again, the story is similar for the top 5 percent and top 10 percent. In Ireland, these income groups not only take a larger share of the national income pie, they take in more Euros than similar high-income groups in the EU-15.

Just to remove any confusion – these income figures refer to ‘equivalised income’ and only to the minimum income in each decile. For instance, the the chart above shows that the minimum equivalised income to get into the top 10 percent to be €41,200. However, the actual average income for the top 10 percent is over €123,000. The difference is down to factoring in the number of people in the household.

The main point here is that Irish high-income groups compare very favourably to high income groups in other countries.

3. Implications for Budget 2013

Let’s play a game. Let’s say that the Government wanted to increase taxation on high-income groups but didn’t want to ‘soak’ them. Let’s say that they would only increase taxation to the extent that it reduces the disposable income of high income groups to EU averages. How much revenue could they expect to take in? This is based on the disposable income figures provided by the ESRI in their recent Economic Commentary.

If the Government fashioned a set of tax measures – rates, reduction of tax expenditures, new taxes, etc. – to bring the disposable income of the top 10 percent to EU averages, it would take in between €3 billion and €3.5 billion, enough to reach their Budget 2013 deficit target. If the Government went Nordic, it would be enough for the next two budgets.

Would this be too onerous on high income groups? No. It would mean they would be ‘earning’ the same as their EU counterparts. But let’s not forget: we are in recession, we are in a bail-out. If there is a time to ask people who can afford it to make a sacrifice, now is that time.

None of the above should be taken as an argument that we can tax-the-rich out of this crisis. For that, we need to increase growth, employment and wages. However, increasing tax on high-incomes can supplant cuts in public services, public investment and social protection, and would minimise damage to domestic demand. One does not need to be some wild-eyed, paid up member of the local ‘eat-the-rich’ chapter to see the pragmatic benefits of this approach.

Others have. As Cedar Lounge Revolution points out – in one country a party and presidential candidate actually kept their campaign promise to increase taxation on high income groups; up to 75 percent on the richest in the economy. Vive la France!
So let’s apply a little common sense. Let’s pursue a rational fiscal approach. Let’s bring a little equity into policy.

Let’s turn on the bath water.

Thanks to Dara Turnball for alerting me to this Eurostat database.


Anonymous said...

For instance, in Ireland the middle 5th decile household averages €31,565 in Disposable income. The range of Gross income in this 5th decile goes from €30,361 to €37,467. So an income of €30,361 is the starting income for the 5th decile.


I think you risk sowing confusion through your use of the term disposable income which many would understand as discretionary income.

Certainly it is used in that sense in the recent ILCU What's Left survey.

So to clarify, you mean net income after taxes, not what's left after all bills are paid, right?

Otherwise a range in gross income of €30,361 to €37,467, giving an average of €31,565 in disposable income couldn't possibly add up.

What by the way is the average net income in that 5th decile?

Michael Taft said...

Anonymous - I hope its not too confusing. Disposable income is the income left to the household after taxation. It is not the 'discretionary' income that the credit union survey uses (though this is an important measurement).

The EU SILC data shows that the weekly 5th decile range goes from €584 to €721 with average disposable income (after tax) being €607. This can happen if the households in the cohort is grouped at the lower end. Though as I review the ranges of other deciles, it looks like the 5th decile is slightly skewered. I hope this doesn't detract from the main point of the post re: high incomes.

The EU SILC data can be found here in Table 1.1: http://www.cso.ie/en/media/csoie/releasespublications/documents/silc/2010/silc_2010.pdf

Anonymous said...

Would this be too onerous on high income groups? No. It would mean they would be ‘earning’ the same as their EU counterparts.

Well said!

Now, who was that prominent union-affiliated economist who claimed that Irish public sector wages couldn't possibly be scaled back to European norms?

You know, the guy who reckoned such comparisons were apples-with-oranges, didn't take into account the high cost of living or any number of other unique Irish circumstances that absolutely required that the our public servants earn a substantial premium over their European counterparts.