History shows income inequality can be changed by government policy

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of the s, where the inequality continues

to drop in Ireland (and the UK) but begins to

stabilise in the US. The second divergence is

at start of the s when the highest earn-

ers in Ireland begin to fall back from the UK

(and US) trend.

WTID ﬁgures show that since the –

 Financial Crisis, the incomes of the

top % in the USA have recovered and sur-

passed pre-crisis levels.

The most important lesson to be drawn

from the work of Piketty and his colleagues

is that changes in income inequality are not a

manifestation of inviolable laws of econom-

ics, but rather they occur as the result of very

speciﬁc policy choices made by certain gov-

ernments at certain times. The main signal

in the data, i.e. the decline in income con-

centration from WWII until the mid-s

and its subsequent rebound, were caused

by structural changes related to WWII

and by the actions of conservative govern-

ments respectively (these agents have been

discussed in Piketty’s ‘Capital in the st

Century’ and elsewhere and I will not repeat

them here). The divergence of Irish (and UK)

income-inequality from the US trend has

been ascribed by Professor Piketty to the

fact that after the war the income earned

from capital, speciﬁcally from land and

ﬁnancial assets, dropped further and for

longer in Europe than in the US.

Presumably the second Irish divergence

(from the UK) in the s was due to the

fact that the UK and the US began reduc-

ing their highest income-tax rates at the

start of the decade whereas Ireland’s high-

est income-tax rate peaked in the middle of

that decade, to the consternation of those

on the PAYE marches.

HOMAS Piketty and his colleagues

at the World Top Incomes Database

(WTID) have revolutionised the study

of income equality through their clever har-

vesting of data from historical tax receipts

and national budget records. Their data

can be used to study how the proportion

of national income collected by the very

wealthiest people in society has varied

with time. The period for which complete

records exist varies from country to coun-

try; for example there are extensive records

dating back to the revolution for Professor

Piketty’s home country of France but there

are much less comprehensive records from

the relatively young Irish state. Nevertheless

Piketty’s Irish data do provide some interest-

ing insights for the period  – .

Chart  shows that at the end of the

Second World War (WW II), the top % of

earners in Ireland, the United Kingdom

and the United States collected about %

of all national income. The share collected

by the wealthiest people dropped in the sub-

sequent decades and then rebounded from

the mid-s. At the start of the new mil-

lennium, before the Global Financial Crisis

hit, the concentration of income at the top

was almost back at pre-war highs.

Considering the data from an Irish per-

spective one notices two points in Chart 

where inequality in Ireland diverges from

that of a larger country: the ﬁrst, at the start

Piketty shows Irish inequality followed paths of US

and UK but not Denmark. By Kevin Buckley

History shows

income inequality

can be changed by

government policy

Income inequality in Ireland has narrowed

during the economic crisis due to the

protection of welfare rates and middle-

income earners shouldering the burden of

tax increases

“

Thomas Piketty

POLITICS

SPECIAL

1980 1990 2000 2010

Year

Share of national income of the top 0.5% (%)

Ireland

Denmark

Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez,

The World Top Incomes Database, http://topincomes.g-mond.parisschoolofeconomics.eu/20/06/2014

CHART 2: The even luckier 0.5%

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It also seems to be the case that while the

US has been getting more unequal in the

downturn, that for Ireland the Gini coeﬃ-

cient, at least, is around where it was at the

start of the downturn. Since this is not the

case before re-distribution, it must be in par t

because of a progressive decision to keep

social welfare relatively high even though

the numbers receiving it have burgeoned.

These explanations raise interesting

questions about the relationship between

growth and inequality; speciﬁcally, one

could ask if growth in an economy is always

accompanied by an increase in income-

concentration.

A quick consideration of Chart  shows

that this is not the case, as the great

post-WW II economic expansion in the

US and UK was in fact accompanied by a

1940 1950 1960 1970 1980 1990 2000 2010

Year

Share of national income of the top 1% (%)

United States

United Kingdom

Ireland

Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez,

The World Top Incomes Database, http://topincomes.g-mond.parisschoolofeconomics.eu/20/06/2014

CHART 1: The lucky 1%

POLITICS PIKETTY SPECIAL

Gini Coefcients

of Equivalised

Disposable Income

(2011)

Rank

Country

Gini Coeﬃcient

Norway

22.6

Slovenia

23.7

Iceland

Sweden

24.8

Czech

Republic

24.9

Slovakia

25.3

Netherlands

25.4

Finland

25.9

Belgium

26.6

Hungary

26.9

Malta

27.1

Austria

27.6

Luxembourg

Denmark

28.1

Germany

28.3

Switzerland

28.7

France

30.5

Croatia

30.5

Poland

30.9

Cyprus

Ireland

31.2

Italy

31.9

Lithuania

Estonia

32.5

United Kingdom

32.8

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AS already stated, the WTID trends for Ireland only cover up

to 2009. But there are other reasons why Ireland’s inequality

trajectory is not as clearly accounted for by Piketty’s data and

central thesis as the US’ and some other countries’. First, Piketty

focuses on pre-distribution income but, as the ESRI has shown,

redistribution in Ireland – through direct taxation and welfare

– very signiﬁcantly reduces inequality. This is much less the

case in the US where welfare is more basic. Indeed of the 31

wealthy countries included in an OECD analysis for 2009, Ireland

had the highest level of inequality for direct income by some

distance. Ireland’s tax and transfer system, on the other hand,

had the biggest impact on reducing the level of income inequality,

putting us 17th out of 31 countries and making us more equal

than the OECD average albeit by a narrow margin, in 2009.

Second. Piketty focuses on the richest 1% and .5 % of the

population whereas the Gini coeﬃcient (a statistical measure

of income distribution that is used as a measure of inequality)

is a better measure that measures the

entire

population. Data

from the ESRI suggest that from the late noughties the post-

redistribution Gini coeﬃcient improved in Ireland. Having

disimproved in the early years of the boom from 30.2 in 2000

to 32.4 in 2005, income inequality in Ireland has narrowed

during the economic crisis due to the protection of welfare

rates and middle-income earners shouldering the burden of tax

increases, according to the ESRI. In 2011 it was 31.1. and for

the latest year available 2012, it remained around the same.

However, there is no room for complacency as it leaves

us more unequal than we were in 2000. It is worth noting

in passing the egregiousness of Ireland’s pre-distribution

inequality, which soared at the start of the downturn and has

only modestly decreased in the following years. Longer-term, it

has disimproved from under 49 in 2005 to over 53 in 2012. •

decrease in inequality (the growth of inequal-

ity during Celtic Tiger Ireland shows, however,

that decreasing inequality is not a necessary

condition for booming growth, even if some,

including Paul Krugman and Standard & Poors

in the US have been arguing inequality is a hin-

drance to growth).

Looking at Piketty’s graphs for inequality

in Ireland since WW II one could query why

Ireland, which didn’t suﬀer as badly as other

countries during the war and which didn’t elect

especially conservative governments from the

mid-s, followed (to the ﬁrst approxima-

tion) the same trend as the US and the UK. One

could hypothesise that increasing income ine-

quality is something like a strong global tide

that Ireland is, in the main, powerless to resist.

This hypothesis is falsiﬁed by the consideration

of another small, relatively wealthy Western

European country, Denmark (Chart ). In the

thirty years since, the most highly paid peo-

ple in Ireland (this time the top half of %, for

variation) have doubled their share of national

income, the most highly-paid people in Denmark

have, if anything, been getting closer to every-

one else.

Piketty’s work doesn’t just show that income

inequality is a problem, and growing in most

places; it shows that levels of income are national

constructs which can be controlled by govern-

ment policy. Complex as it is, if we are serious

about addressing inequality we must analyse the

data to fuel progressive public policy. •

Ireland since 2009: complex

Towards the end of the boom and during the

downturn the Gini coeﬃcient, which measures

equality, improved in Ireland, post-redistribution

2005 2006

France Ireland Spain Portugal UK

2007 2008 2009 2010 2011 2012

Gini coefcient before direct taxation and welfare

payments

2005 2006

France Ireland Spain Portugal UK

2007 2008 2009 2010 2011 2012

Gini coefcient including direct taxation and welfare

payments

2005

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Government transfers as a percentage of GNP