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The most unequal, before taxation (2010)

OECD says Ireland’s tax and benefit system raises us from worst out of 31 to 17th worst out of 31, for direct incomeSinéad Pentony 

 

The OECD recently released an update of its income inequality statistics. This provides a high-level analysis of income inequality across 33 OECD countries for the first three years of the crisis, up to the end of 2010. While important, the data used are 3-4 years old and a lot has happened in the intervening period of tax increases and public-expenditure cuts.

Income inequality increased by more in the first three years of the crisis to the end of 2010 than it had in the previous twelve years, before factoring in the effect of taxes and transfers, according to the report. Our welfare systems have cushioned the blow for many but the report warns that further social-spending cuts in OECD countries risk causing greater inequality and poverty in the years ahead.

The report includes country-specific data on the Gini coefficient for direct income (household income prior to taxes and transfers). Direct income includes employee earnings, employer PRSI, self-employed earnings and other direct income. The Gini coefficient measures income inequality, with a score of zero signifying all households having identical income and a score of 100 meaning all income going to one household.  For the 31 countries included in this analysis, Ireland had the highest level of inequality for direct income by some distance. The (2009) Irish figure of 59.1 is well above the OECD average of 47.0.

Ireland’s tax and transfer system, on the other hand, had the biggest impact on reducing the level of income inequality, giving us a net Gini coefficient score of 30.7 compared to an OECD average of 31.3. This puts us 17th out of 31 countries, making us more equal than the OECD average albeit by a narrow margin. However, this must be seen in a context of a general rise in income inequality across the board, internationally.

High levels of income inequality increase the risk of poverty and stifle economic activity

This outcome reinforces the importance of the tax and benefit system in protecting low-income households and in re-distributing income from the top to the bottom. Our taxation system is clearly progressive and effective in terms of re-distribution. However, the figures also highlight that huge income differentials persist in Ireland even in times of crisis.

High levels of income inequality have social and economic consequences. They increase the risk of poverty and stifle economic activity, particularly in the domestic economy. In 2011 the EU Member states with high levels of income inequality also featured high levels of risk of poverty. Ireland was 10th out 27 EU Member States, putting us with the group of countries with higher than average levels of inequality and risk of poverty. The other countries in this group include Poland, Italy, Portugal and the UK. Chart 1 illustrates this relationship between income inequality and at-risk-of-poverty rates in the EU Member States. It uses the ‘at-risk-of-poverty’ indicator and the quintile share-ratio measure, which measure the income gap between the top 20% and the bottom 20% of earners.

pentonygraph1

Policy options to reduce income inequality include raising incomes at the bottom, capping incomes at the top, using the tax and benefit system to re-distribute income, and ensuring that big corporations pay their fair share in taxes. The latter requires a global response to ensure multinational corporations pay their fair share. Income caps and reductions have been introduced in the public sector and the social-welfare system provides a minimum income in Ireland. But, with over 730,000 people at risk of poverty, the current levels of social welfare are clearly inadequate.

The government plans to close the remainder of the deficit primarily through spending cuts, with minimal tax increases. The OECD recently published figures for the tax wedge (essentially the difference between before- and after- tax wages) in ‘Taxing Wages 2013’. The tax wedge is generally reported as a percentage of total labour costs, including PRSI. This report shows that for a single worker without children, Ireland has the lowest tax wedge in the EU and the seventh lowest among the 34 OECD member states included in this report.

Ireland’s income-tax take is around the OECD average, but the social-insurance contributions for both employees and employers are below average (See Chart2). A gradual move towards OECD-average levels of Social Security Contributions (PRSI) would strengthen our social safety net and enable a basic level of income for everyone.

pentonygraph2