On the unequal distribution of our increased income

TASC have released a report which states the following:

According to figures released by Revenue, the total income of those liable for income tax was €77 billion in 2011. By their calculations, this is expected to rise to €98 billion in 2016. This €21 billion in new income represents an increase of more than a quarter in just five years. This includes 355,000 new tax cases (either couple or individuals), a rise of 17% from just over two million to 2.4 million (see appendix of this paper for all calculations).

The most startling thing about these figures is how unequal the gains have been. Of the €21 billion in extra cash, about €12 billion, more than half, has gone to the top 10% of earners. Two thirds of it - €14 billion - has gone to people who earn more than €70,000, despite the fact that they make up less than 15% of Revenue’s income tax cases.

On the other hand, less than a third (€6.5 billion) has gone to the middle 60% of earners, with only 6% of all the increase going to the bottom 50%.

This represents a fundamental shift in how the market distributes income. From 2011 to 2016 the share of income going to middle income earners fell from 52% to 46% which is a loss of more than 10% of the share of all income. At the same time, the Top 1% went from having 9% of all income to having 11% of all income – a gain of more than 20%.

Given that there is an expected €21 billion increase in Gross Income from 2011 to 2016 one wonders whether the definition of Gross Income has changed?  Will Gross Income really have increased by 27 per cent over this five year period? 

If true it is a remarkable performance.  However, if “more than half, has gone to the top 10% of earners” then that would knock a lot of the lustre off it.  But the report itself points to a couple of points which indicate that the distribution of the increase may not be as skewed as the headline-grabbing points suggest.

The first is that there are 355,000 new tax cases.  By definition these have to have received additional income.  However, we don’t know where they have entered the distribution so it’s hard to draw out how much of the additional income has gone to new earners and how much has gone to existing earners.  If new earners enter towards the top of the distribution is this a bad thing?

And this points to the second issue with the analysis.  Who is in the group that comprise the Top 10 per cent?  Actually the report notes that we don’t have figures for the Top 10 per cent. Footnote 19 says:

Because of the nature of the Revenue data, the groups are approximate. In 2011 the bottom 50% was 49% of all tax cases, the Middle 60% was 58%, the Top 10% was 9.8% and the Top 1% was 0.91%. In 2016 the bottom 50% was 46.3% of tax cases, the middle 60% was 56.4%, the Top 10% was 11.8% and the Top 1% was 1.2%. This will account for some variation in the data.

You can be sure it will “account for some variation in the data”!  Comparing the top 9.8 per cent in 2011 to the top 11.8 per cent in 2016 is misleading.  Of course this group has extra income – you just put an extra 20 per cent of tax cases into it!  Here are the details of tax cases with Gross Incomes over €75,000 in the two years.

The changes are pretty clear.  What is noteworthy is that for a group that apparently got more than half of the €21 billion of additional income is the what happened to the average income of the group.  Yes, averages have their problems and there are lots of moving parts here but the average increased by 2.5 per cent whereas the total income in the group increased by over 45 per cent.  This suggests that most of the increase in the income of this group is down to the increase in the number of people in the group rather than increased income for the people who were in the group to begin with.

If the comparison was a like-for-like comparison so that 9.7 per cent of tax cases were analysed in each year then there would be 234,440 in the 2016 group rather than the 283,674 that were actually in the group.  This means that 49,234 tax cases were added to the “Top 10%” because it actually went from the “Top 9.7%” to the “Top 11.8%”.

If these 49,234 extra tax cases put into the group had a Gross Income of €75,000 (the lowest possible) then this means there is a minimum of €3.7 billion of extra income in the “Top 10%” that is only there because of the increased size of this group.  That is 31 per cent of the additional income attributed to this group.

A headline that the “top earners main winners in recovery” is clearly what the analysis was designed to engineer.  But it is not true.  The main winners are the recovery are the 355,000 new tax cases since 2011.  From the data available is it impossible to say where these new tax cases have entered the distribution.   This would paint a much different picture than doing arithmetic acrobatics with the distribution.

For example, every €10,000 of Gross Income that these new tax cases have is €3.5 billion of Gross Income.  How much of the €21 billion of Gross Income is the result of these new tax cases?  If they’re at an average of €30,000 that is €10.5 billion.  That is half the increase in Gross Income from 2011 to 2016.  It is unequal but it is desirably unequal.

However, the distribution of income Gross Income among recipients in 2016 seems set to similar to what it was in 2011.  Here are the Lorenz curves for the two years:

Using the shares of gross income and tax cases the approximate Gini co-efficient for each year is:

• 2011: 0.475
• 2016: 0.485

There has been an increase in inequality between the two years However without testing for the significance of this difference or knowing what happened in the intervening years we cannot be too conclusive about the pattern.  It is also likely that the distribution of market income across the population is more equally distributed as there are 355,000 new tax cases in 2016 compared to 2011.

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