Monday, 28 July 2014

The Inequality Debate

Cormac Staunton: The ESRI today released a Research Note on The Distribution of Income and the Public Finances.

It adds to the growing debate on economic inequality in Ireland. The paper asserts that the level of inequality in Ireland has fallen since the onset of the crisis in 2008 and that “the burden of increased taxation had to be carried by those on middle incomes.”

Given the importance of inequality and the continued discussion of helping those on “middle incomes” these claims require some analysis.

Inequality – on the rise again
The paper says that Ireland has seen “a significant fall in the Gini coefficient in the crisis years 2008-2012”. The Gini Coefficient is a measure of income distribution. A high figure implies higher inequality and a lower figure implies more equal distributions of incomes.

However, according to CSO SILC data the Gini for Ireland in 2008 was 30.6. In 2012 it was 31.2. This means that in this period, overall income inequality actually rose.

While inequality as measured by Gini did fall in the immediate aftermath of the crisis, and hasn’t returned to the heights of the boom (it was 32.4 in 2006), the change in Gini in the period up to 2012 does not show any clear reversal of the trend towards rising inequality in Ireland.

The rise and fall (and rise) of high incomes
The paper also shows the decline in the incomes of those earning more than €100,000 a year from 2007 to 2011. The number of tax units earning over €100,000 fell 14.7 per cent. The total income of that group declined by 22.9 per cent and average incomes fell 9.3 per cent. The paper uses this as evidence to show both a lessening of inequality and a negative impact (through higher taxes) on those on “middle incomes”.

While the fall in incomes for those above €100,000 is dramatic, there is provisional data to suggest that those incomes have been on the rise from 2011-2013. Total income above €100,000 was 10 per cent higher in 2013 than in 2011. Also the number of tax cases in this category rose from 99,129 in 2011 to 106,650 in 2013.

So while there was an initial reduction in high-incomes from 2007 onwards as the economic crisis took hold, there is already a recovery underway for this group.

What is "middle" income? 
The paper also implies that the tax “burden” has increased for those on middle incomes. There is no definition of what constitutes “middle income” in the paper but it is appears to be anyone below €100,000.

Defining “middle income” is of course tricky. However it is unlikely that this paper is referring to “average incomes” because we know that taxes on average incomes in Ireland are amongst the lowest in the OECD.

It seems from the paper that “middle income” means those above average wages (which are around €37,000), but below €100,000.  This is not so much middle as “upper” as those above €40,000 are in the top 30% of earners, and 95% of income tax cases are below €100,000.

Assuming this is the group, (€40,000-€100,000) that is referred to as “middle incomes”, it is clear that their contribution to overall income tax take did rise from 43.4 % of all income tax to 46% from 2007 to 2011.

However, looking again at the 2013 figures we see this is falling again, down to 45.1% in 2013. (Total income in this group has also increased by 5% in that time.) This is in line with rising incomes above €100,000.

Whatever the definition of “middle income”, looking at “percentage of all income tax paid” gives an incomplete picture of the tax system. It also does not take in to account the effect of massive cuts to services, which affect those on low incomes (low wages or welfare incomes) the most.

The paper does cite another ESRI study from 2013 which gives a broader analysis of the changes in taxation since the crisis which found that “changes in taxes and benefits tended to have the biggest negative effect on the top (-15 per cent) and bottom deciles (-12.5 per cent) of the income distribution”.

Given the complexities of incomes, taxes and welfare, this is perhaps a more relevant description of the effects of the system, rather than focusing on the “middle income tax burden”.

For more information, TASC has produced a series of papers on the current tax system.

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