Wednesday, 11 February 2015

Economic Inequality: More than Incomes and Wealth

Cormac Staunton: When discussing economic inequality, there is a tendency to focus on income inequality (or sometimes wealth inequality). This is because there is more data on incomes, and income inequality can be (over) simplified with measures like the Gini Coefficient.

However, economic inequality is about more than just incomes and wealth. TASC’s forthcoming report, Cherishing All Equally, is the first study to take an overall view of economic inequality in Ireland. To get a full picture of economic inequality we need to look at a range of other factors, a few of which are discussed here.

While the price of something might be the same for everyone, the cost of it will be very different. A €100 price tag will take more of the income of a person on minimum wage than it would for someone on €100,000 per year.

Therefore a high cost of living makes the economy more unequal. When everyone faces higher basic costs, those who earn less have to spend a higher proportion of their income. Charges for public services have the same effect.

In Ireland we provide social welfare cash payments, but we require people to put their hand in their pocket for many services (e.g. GP visits) that might be free-of-charge or subsidised in other countries. We also have a cost of living that is 20% above the EU average.

So while cash payments reduce income inequality, the higher cost of living and charges for public services increase economic inequality.

Public Services
Public services play a major role in addressing economic inequality. In particular, they reduce major costs that most people, regardless of their income, could not afford on their own. This is most obvious in relation to education, old age, job loss, disability, illness and the costs associated with raising children.

Public services are also investments that are central to Ireland’s economic prosperity, including roads, electricity networks, support to businesses and education.

In order to reduce economic inequality, public services must be high quality, respond to public needs and be affordable for present and future generations. They need to be sustainable and capable of change in the face of future issues like the ageing of the population.

When people do not receive the public services they need, they often simply go without. And this failure can be invisible in the national statistics. TASC’s forthcoming report finds that the way we currently fund, organise and deliver public services in Ireland is not sufficient to reduce economic inequality and to provide quality outcomes for all.

In order to provide public services and invest in our national infrastructure we need to raise money. The amount of public services that can be provided is directly related to the amount of tax we raise.

The goal of tax policy should be to favour progressive and proportional taxes, which are based on people’s ability to pay. The overall progressivity of tax revenue should be gauged not only in relation to income tax, but by looking at the effect of all taxes, charges and tax reliefs that make up the whole tax system.

Taxes on consumption, which are the same for everyone regardless of their income, make up more than a third of all tax revenue in Ireland, making the system more unequal. Taken as a whole, Ireland has far lower taxes and social insurance as a percentage of GDP than the EU average.

When tax revenue is limited, services will be weaker and this will make society more unequal. If people want more extensive or higher quality public services to be provided in Ireland, greater levels of tax revenue will to be required.

As well as having these direct effects, taxes have other effects on the wider economy and can influence business decision making. There are complex trade-offs between pursuing redistribution through taxation and other priorities such as boosting job creation (which can also reduce economic inequality). However, these goals are compatible and a well-designed tax system can achieve both of these successfully. Ireland’s future tax system will need to be radically changed if it is to take on the challenge of counteracting income and wealth inequality, while also supporting socially-beneficial economic activity, boosting job-creation and providing public services.

Low Tax Triangle
Taking these three together (Public Services, Tax and the Cost of Living) we see that Ireland is stuck in a low-tax spiral. Because we have low overall taxation, we don’t subsidise as many services as other countries. This causes people to put their hand in their pocket for services - GP visits, school books, transport - that would be free-of-charge or cheaper in other countries. Because people in Ireland have less cash after these costs are paid for, they may not see the value of paying more tax. Which means we can’t provide the services… and the cycle continues.

Virtuous Circle
The alternative would be where public services, paid for by taxes, free up cash for people to spend in the local economy and help people to access employment. This creates a ‘virtuous circle’ where more people working and spending in the economy drives economic growth and creates jobs for others. This can be explained using the example of childcare:

Looking after young children is an expensive business, one that cannot be done ‘on the cheap’. Unlike Ireland, most European countries subsidise childcare to make it affordable for young families. This saves families hundreds of euro each month - which is more than any tax cut could do - and gives them more money to spend in the local economy.

And because many parents in Ireland stay home because childcare is unaffordable, subsidised childcare would give more parents the choice to work outside the home. Providing public services (rather than tax cuts) can therefore increase employment and reduce economic inequality, while also making economies stronger and more sustainable.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton

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