Distribution and Participation

Figures from the World Inequality Database show that the top one percent share of pre-tax fiscal income rose from around six per cent the mid-1980s to around 12 per cent in the mid-2010s.

Figures from Eurostat show that the share of the population in non-agricultural employment rose from around 25 per cent in the mid-1980s to 45 per cent in 2019.

The distribution of fiscal income is a useful indicator but the data is based on a sub-sample of the population that is always change: only those who have fiscal income, i.e. those with tax returns filed either by themselves or there employer.  The income shares across the population have to be estimated and it is assumed that those people who are not included in the data have no income – or, at least, have no pre-tax fiscal income.  

Changes in participation could have an effect on how the distribution of pre-tax fiscal income should be interpreted.  Changes in the distribution of pre-tax fiscal income among recipients may not necessarily reflect changes in the distribution of that income across the full population – even with the assumption of zero income for those with no pre-tax fiscal income.

From the EU-SILC we do have a top one per cent share for disposable income, albeit for a shorter time period.  Of course, there may be issues with the use of a survey to measure incomes at the extreme of the distribution (super-high incomes may be under-represented in the sample) but to the extent that this is a consistent problem with income surveys the trends in incomes shares towards the top of the distribution may be relatively unaffected.

The top 1 per cent share of disposable income in the SILC fell from around seven per cent in 2005 and 2006 and dropped under five per cent after 2010. In recent years it has risen but at 5.5 per cent of so remains below the levels of the mid-2000s.

For what it’s worth, the bottom cut-off for the top one per cent in 2019 was an equivalised disposable income of just over €100,000 or €210,000 for a household of 2 adults and 2 children.  The SILC suggests there are close to 50,000 people living in such households.

The work of Kennedy et al (2019) gives income shares for both gross and disposable income in the fiscal data from tax returns.

This is different to measure of disposable income in the SILC but the pattern is roughly the same.  In the table we can see that the top 1 per cent share of disposable income fell from 2006 t0 2012 and rose thereafter but remained below the 2006 level.

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Why has income inequality fallen in Ireland?

The question of why income inequality has fallen in Ireland should get more traction in the discussion of social outcomes in Ireland.  If rising inequality is a global concern shouldn’t we there be a wider understanding of how one of the few countries to generate a reduction in inequality achieved it?

Ginis from 1980s to now 

The measurement of inequality is a non-trivial task.  For our purposes here we will limit the discussion to gini coefficients from survey data and look at estimates of gini coefficients for market, gross and disposable incomes.  These are good indicators but by no means perfect.

The gini coefficient has a range of zero to one.  Zero represents perfectly equality – everyone has the same; one represents perfect inequality – one person has everything.  Anyway, here are changes since the 1980s in the gini coefficients of disposable income for a sample of countries covered by the Luxembourg Income Study.

For most of the selected countries, income inequality increased. And there is Ireland down close to the bottom with a reduction in its gini coefficient of 0.034 (from 0.328 in 1987 to 0.294 in 2010).  For the sample as a whole, the arithmetic mean of the gini coefficients increased by 0.023 (from 0.269 in the 1980s to 0.292 for the latest estimates). 

As can be seen in the outer panels, Ireland went from being one of the most unequal countries in the sample in the 1980s to being pretty much in the middle by the 2010s.  So why has Ireland’s relative position improved?  Why hasn’t Ireland seen the increase in inequality that has been evident in most other high-income countries?

Primary Income, Transfers, Gross Income, Taxes and Disposable Income

The sample in the above chart was chosen because of the availability of estimates using data from the Luxembourg Income Study of comparable estimates of the gini coefficient going back to the 1980s for:

• primary income (labour income + capital income + private transfers)
• gross income (primary income + social transfers)
• disposable income (gross income after tax)

Using  these we can assess the impact of the starting point of primary income, the contribution of social transfers tp gross income and the impact of income taxes on the changes in a country’s gini coefficient for disposable income over the past 30 years or so.

We’ll start with a table of the raw data from Caminada, Wang, Goudswaard & Wang (2017) which has useful information on the definitions and variables used.  There is also estimates for many more countries but the sample selected here is one which allows a full comparison between the 1980s and 2010s for primary, gross and disposable incomes.

OK, lots going on there.  From an Irish perspective what do we see?  Well, for primary income (labour income + capital income + private transfers) Ireland had the highest gini coefficient for both time period. 

Ireland was average for the impact of social transfers on income inequality in the 1980s but was highest in the 2010s.  The latest available year for Ireland in the study was 2010 which obviously was the midst of a crisis period following the crash of 2008 so unemployment transfers may be a factor.  We will come back to this.

In terms of gross income (primary income + social transfers) Ireland went from inequality that was well above the average in the 1980s to being slightly above the average in the 2010s.  For the impact of taxes (including social contributions) on inequality, in the 1980s, Ireland was close to the average and moved to having one of the largest impacts of taxes by the 2010s.

And the bottom line is, that within this group of countries, Ireland went from having inequality in disposable income which was well above the average in the 1980s to being pretty much bang on the average in the 2010s.  Ireland’s gini coefficient went from being 0.06 above the average in the 1980s (which in relative terms was 22 per cent higher) to being equal to the average in the 2010s.

But this headline approach only hints at why Ireland has seen a reduction in inequality while it has risen in most other high-income countries.  Next, we identify the changes in the above table.

Like the chart at the top, the table here is ranked by change in inequality in disposable income (in absolute terms).

We can explicitly see now that inequality in primary income increased in all of the selected countries, bar France where there was essentially no change.  In absolute terms, the increase in the gini coefficient for primary income in Ireland was close to the average of the group.  In relative terms, the increase in Ireland was lower (as Ireland had a higher level of primary income inequality to begin with).

The impact of social transfers on income inequality generally increased across the group.  There were some countries where the impact of transfers fell (notably Slovakia and The Netherlands) but typically across the group, social transfers were doing more to reduce inequality in the 2010s than they were in the 1980s.

Up to 2010 at least, the largest increase in the impact of social transfers in the group was seen in Ireland.  On average across the group, the impact of social transfers reduced the gini coefficient by an additional 0.02 in the 2010s compared to the 1980s.  In Ireland, the additional impact of transfers in 2010 was 0.06.

This meant that the inequality of gross income (primary income plus social transfers) was largely unchanged in Ireland between the 1987 and 2010 where the average of the gini coefficients for gross income rose by 0.03 across the group as a whole.

The final contribution to the change in inequality is income taxes.  Here there was a mixed range of outcomes such that the average change in the impact of taxes on inequality was close to zero.  But within the group, the impact of taxes on inequality fell in Israel, Australia and Switzerland, whereas it increased in Finland, Norway, Denmark and Ireland.

Initial Conclusions: 1987 to 2010

Therefore, when looking at why income inequality in Ireland fell over period 1987 to 2010 we could initially conclude that:

1. Ireland had a similar absolute increase in primary income inequality that other high income countries;
2. The impact of social transfers on inequality increased in Ireland by more than the average increase in other countries; and
3. The impact of taxes on inequality increased in Ireland while it was unchanged on average across other countries.

Taxes and Transfers

So, why did income inequality fall in Ireland while it rose in other countries? Government policies – or, at least, the impact of government policies. This summarises the change in the impact of social transfers and income taxes on inequality.

The fiscal levers in most countries were doing more in the 2010s to reduce inequality than they were in the 1980s, but were not keeping pace with the increase in the inequality of primary income.  In the Netherlands, Israel and Slovakia the impact of transfers and taxes on inequality was reduced.

Ireland stands out as having the largest increase in the impact of taxes and transfers on inequality, and as this was greater than the impact of the increase in the inequality of primary income, we get the resultant fall in income inequality in Ireland.

That was 2010. What about now?

Of course, in any analysis such as this end points matter.  2010 was the last year for Ireland included in the study and that could not be considered a typical year.  The OECD also publish estimates of gini coefficients for market, gross and disposable income but unlike the study used here only go back to 2004.  But the OECD estimates do allow us to assess what has happened since 2010.

A comparison of the OECD estimates for 2010 with those derived using the Luxembourg Income Study for the same year shows they are very similar.

• Market/primary income: OECD 0.577; LIS 0.564
• Gross income: OECD 0.369; LIS 0.366
• Disposable Income OECD 0.298; LIS 0.294

For gross income and disposable income they are essentially the same.  There is a bit of a difference for market/primary income but that is likely because they use different starting points.  The OECD’s definition of market income is labour income plus capital income.  Primary income in the study using the LIS data is labour income plus capital income plus private transfers. 

This means that transfers like voluntary individual pensions are included in the definition of primary income in the LIS study but not included in the definition of market income used by the OECD.  Anyway, it is not a significant factor and changes in the OECD estimates are likely to closely reflect what would happen to the LIS estimates if they were updated for recent years.

So, what do the OECD estimates of income inequality since 2010 for Ireland show?

Thus, we see that in the seven years to 2017, market inequality fell (likely due to the significant increases in employment from 2012 on) while the impact of transfers on inequality fell by more. It would have fallen as a lower share of the working-age population were reliant on transfers with the additional fall possibly because the growth rate of transfers did not keep pace with wage growth.  Over the period the impact of taxes on inequality increased but this is very much driven by the 2017 data point.

Preliminary Conclusions: 1987 to 2017

It’s a bit of an extrapolation but if we were comparing the changes in inequality in Ireland from 1987 (using the estimates derived by the LIS) to 2017 (using the OECD’s estimates) we would say that inequality fell in Ireland because:

• market income inequality rose by less than it did in other countries;
• the impact of social transfers on inequality increased by around the same amount as it did in other countries; and
• the impact of taxes on inequality increased by more than it did in other countries.

Lets look at these in a bit more detail to see how they stack up.

Inequality of Primary and Market Income

The work Caminada, Wang, Goudswaard & Wang (2017) is useful as it provides estimates of primary income inequality going back to the 1980s.  The countries in the sample in this piece are those that have these estimates in gross terms (i.e. before taxes).  A shortcoming is that the estimates do not extend beyond 2013, or earlier for some countries.  As shown above the OECD have estimates of gini coefficients for market income available for recent years.

For most countries there is little difference between the estimates of the gini coefficient for primary income based on the data in the Luxembourg Income Study and the those for market income as published by the OECD.  For example, the LIS primary income gini for Ireland for 2010 is 0.564 while the OECD market income gini for the same year is 0.577.  The treatment of private transfers and voluntary individual pensions is likely responsible for the difference.  In all instances shown for this group of countries, Ireland had the highest inequality in primary or market income.

It is taking a small liberty but we will extend the gini coefficients for primary income from the LIS to recent years using the relative changes in the OECD’s gini coefficient for market income.

This suggests that from the mid-1980s to the late 2010s the average gini coefficient for primary income in this group increased by 0.04 (from 0.44 to 0.48).  Ireland had a lower increase in the inequality of primary income with gini estimated to have increased by 0.01 (from 0.51 and 0.52).

Sidetrack: A Quick Sense Check

Here is a chart to see if the gini coefficients for primary income in the LIS dataset (orange) and those for market income is the OECD dataset (blue) track each other for Ireland.

It is pretty clear that from 2004 to 2010 they do.  There is no reason to believe that the reduction in market income inequality seen in the OECD data since 2012 will not also be evident in the equivalent measure for primary income in the LIS data, if more recent updates are provided.

Also included in the above chart are the best measures of primary income inequality in the LIS waves for Ireland from the late 1990s.  For these years, data on household disposable income was collected as well as data on transfers payments received but it appears the surveys did not include data on income taxes paid. 

So, the grey line above represents primary income with taxes deducted.  Essentially it is the inequality of disposable income excluding transfers.  The estimates suggest market income inequality declined in Ireland in the late 1990s.

Finally, Eurostat’s gini coefficient of income before social transfers (pensions included in social transfers) is shown.  This indicates that the inequality of market income increased in the early 2000s and again after the crash in 2008.  It has been falling in recent years. 

The Eurostat series is pushed back one year to align with the OECD measure in the chart which is estimated from the same survey data but assigns the results to a year earlier than Eurostat.  Eurostat assigns their indicators to the year the data is collected.  The OECD assign their versions of the indicators to the previous year, as that is the time period to which most of the data actually collected applied to.  Anyway, the series clearly track each other; sense check completed; on we go.

The Impact of Social Transfers

While the impact on inequality of social transfers in Ireland is close to the average of the group of countries being assessed, one thing worth noting is that Ireland has a younger population than most of the countries in the sample, or more particularly Ireland has a lower share of the population aged 65 and over.

As pensions are typically the transfer with the biggest impact on inequality it would suggest that Ireland would not be out of line if the impact of social transfers on inequality was lower than in other high-income countries.  Estimates from Caminada, Wang, Goudswaard & Wang (2017) allow us to assess the contribution of various fiscal transfers to gross income.

For Ireland, 2007 is used rather than 2010 as so to get estimates from a non-crisis period.  And we can clearly see that in Ireland social transfers related to old-age make a significantly smaller contribution to gross income compared to almost all the other countries in the sample; only Australia is lower.

In aggregate terms the contribution in Ireland of social transfers to gross income matches the overall average (both are around 22 per cent).  The lower contribution in Ireland from old-age-related transfers is made up by a significantly higher contribution from transfers related to family and children and transfers linked to unemployment.  For the selected countries, Ireland has the largest contribution to gross income from transfers related to family and children.

For these transfers Ireland also has the largest impact on inequality due to them.  But this wasn’t always the case.  As the chart shows in the 1980s the gini impact of family and children transfers in Ireland was in line with the average of the group.  Click to enlarge.

Over the following 30 years, Ireland saw the largest increase in the use of family and children social transfers in reducing inequality.  Across the other countries, only Australia and to a lesser extent the UK, expanded the use of this category of social transfers in reducing inequality.  For most countries the contribution was unchanged, or even slightly down.

By 2010s, Ireland had the largest impact from these transfers on inequality with an impact that was almost three times largest than the average impact across the group.

Impact of Taxes

To show how the impact of taxes on inequality has changed consider the following table.  It shows income taxes (plus social contributions) as a per cent of gross income and the absolute reduction in the gini coefficient as a result of taxes for our group of countries in the 1980s and in the 2010s.  Estimates are not available for France.

Also included is a column for the “gini impact per 1 p.p. of taxes in gross income” which is impact of taxes on the gini coefficient divided by the percent of taxes in gross income.  This is a proxy for the progressiveness of the income tax system.

For Ireland we can see that in both time periods the share of taxes in gross income was about three percentage points below the average (20% versus 23% in the 1980s and 19% versus 22% in the 2010s). 

In the 1980s, the impact of taxes on the gini coefficient in Ireland was close to the average (-.045 versus –0.040).  By the 2010s, taxes in Ireland had a much greater impact on the gini coefficient (-0.072 versus –0.042).

We can highlight this if we look at the change in the “gini impact per 1 p.p. of taxes in gross income”.

For the group of countries as a whole, the gini impact of 1 p.p. of taxes in gross income was essentially unchanged – and most countries recorded very small changes.  The largest reduction was in Switzerland while the largest increased, by, far, were recorded in Finland and Ireland.  The implication is that income taxes have become more progressive in these countries (or at least that the inequality impact of income taxes has increased).

Putting All Three Together: Final Conclusions

So what are our final conclusions?  Why did income inequality in Ireland fall in the 30 years from 1987 to 2017 while it increased in most other high-income countries?  We conclude that:

• Ireland experienced a smaller increase in market income inequality than most other high income countries so less additional redistribution was needed to stand still.
• The impact of social transfers on reducing inequality increased in Ireland over the past 30 years with Ireland having the largest increase in the impact of child and family related social transfers on inequality.
• The impact of income taxes on reducing inequality increased in Ireland over the past 30 by more than in most other high-income countries.

So, the increased impact of transfers and taxes more than offset the modest increase in market income inequality and hence disposable income inequality in Ireland fell. QED.

Lessons for Elsewhere 

Can Ireland export the antidote to rising inequality?  Possibly but only to some extent.  The impact of policy on inequality in Ireland is well understood.  For example, from Callan, Bercholz and Walsh (2018) we have an assessment of the distributive impact of 2014 tax and welfare policies versus 1987 policies:

If 1987 tax and welfare policies (indexed for wage growth) were in place in 2014, household income would, on average be around ten per cent lower.  The largest losses would be experienced by the two lowest deciles, with the income of the bottom decile around 30 per cent lower.

The corollary of this of course, is that the largest percentage income gains from the tax and welfare policies that were introduced in Ireland from 1987 to 2014 went to the bottom deciles.  Giving the largest gains to the bottom deciles will result in a reduction in inequality.  Policy has been one of the major factors in the reduction in inequality in Ireland.

Of course, whether other countries want to go with Ireland’s flat-rated system of welfare and state pension payments, our increased use of child and family related social transfers and our tendency to take people “out of the tax net” is another matter.  Countries may have priorities and objectives other than reducing income inequality that frame their policy choices. 

They may wish to have pension systems where the benefits and not just the contributions are earnings related.  They may wish to provide services for families and children rather than cash transfers.  They may wish to have a broader tax base with tax collected across all income levels rather than being concentrated on the top.  In many ways these would be considered progressive choices but they would likely lead to an increase in measurements of income inequality.

And there is one thing from Ireland of the past 30 years that other countries are unlikely to be able to recreate: The Great Transformation.

As we said above end-points matter.  We looked above at with has happened in the OECD data since 2010.  But also looks at what happened since 1987 – a near miracle increase in employment.  In the past 30 years, the percentage of the Ireland’s population in non-agricultural employment almost doubled.  The expansion of employment will have resulted in an expansion in the distribution of market earnings.  While government policy undoubtedly had a role to play in the reduction in inequality the impact of the turnaround of the economy should not be overlooked either.

Income and Inequality

To conclude we take an extract from a table in this paper by Thewissen, Kenworthy, Nolan, Roser, and Smeeding (2015) and here.  We will do so to add the growth of household income to the changes in income inequality discussed above.  The chart here shows average annual real growth rate in median equivalised income and the average annual change in the gini coefficient.

It’s not too hard to count the number of countries from our sample that made it into the quadrant for high income growth with falling income inequality. 

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Taxing Wages and the OECD Average

Last year we queried how it was that the OECD placed Ireland in the “low tax” group for it measure of the net personal income tax rate (income tax plus employee social insurance contributions) on an employee earning the average wage.

As the previous post highlighted it was because the OECD used an average wage that was too low.  As a result of this, when the OECD published their Taxing Wages 2019 update the average wage used for Ireland was changed.

In Taxing Wages 2018, the average wage used for Ireland for 2016 was €35,430.  In Taxing Wages 2019, this is now €44,720 (with the average estimated to have risen to €46,675 by 2018).  The previous post explains why the revised figure is more appropriate (in line with other countries supervisory and management workers are now included and part-time workers are excluded).

The post suggested that using a more appropriate figure would likely put Ireland close to the OECD average for the tax rate on the average wage.  So what is the outcome?

What country is that pretty much matching the OECD average? Yes, Ireland. The group of countries with tax rates using this measure of less than 20 per cent has been reduced by one.

This year’s Taxing Wages also included a nice chapter on median earnings.  Here are charts of the marginal and average tax rates on median earnings.

These show Ireland to have the third-highest marginal tax rate on median wages but the tenth lowest (of 36) average tax rate on median wages.

And to conclude here two charts of the tax rates (personal income tax plus employee social insurance contributions) at 67 percent and 167 per cent of the average wage (These are estimated to be €31,300 and €78,000 for Ireland in 2018).

Thus we can conclude that, relative to the other OECD countries, the latest OECD data indicate that Ireland has below average tax rates on below average wages, average tax rates on average wages and above average tax rates on above average wages. Tweet

Does one-third of Income Tax and PRSI come from IDA client firms?

The IDA summary of their 2018 results includes the following:

IDA Ireland’s clients are also significant employers; with average salaries at €66,000 in 2017 they are consistently above national averages (€46,402). As a result foreign MNCs account for one third of total Income tax, USC and Employers PRSI paid in the state.

Does one-third of Income Tax, USC and PRSI come from IDA client firms? No.  Ireland’s national income is heavily influence by the contribution of foreign-owned MNCs but that does not extend to them being the source of one-third of income tax revenues.

According to the Revenue Commissioners net receipts in 2017 from Income Tax/USC and PRSI came to €28.7 billion in 2016 and €30.2 billion in 2017.  It is easy to see that the IDA claim is incorrect from this summary table.

The numbers are impressive but unless almost all the €11.7 billion of payroll from these companies in 2017 went to tax and PRSI there is no way they can contribute one-third from a total of €30.2 billion.

The footnotes to the table state that the IDA’s claim is “based on Revenue analysis of foreign owned multinational employer returns for 2016 of income tax, USC and employer PRSI excluding wholesale and retail trade.”  They are referring to this paper by McCarthy and McGuinness which includes the following figures:

We can see that payroll Income Tax, USC and Employer’s PRSI from foreign-owned MNCs came to €6.7 billion in 2016.  This is for all foreign-owned MNCs not just those who are IDA clients.  The IDA note that they exclude firms in the wholesale and retail trades (who won’t be their clients) but are probably still left with a figure that is around €5 billion (which is 45% of the payroll total for 2016 from the first table).

Now, this may be nearly one-third of the €16.7 billion shown for Income Tax, USC and PRSI shown in the table but this is only the amount that arises from companies.  It excludes the self-employed, the public sector and non-labour related sources of income taxes. 

IDA-client firms may be the source of one-third of a particular sub-set of income taxes but that is not what they have claimed. It looks like the answer may be around one-sixth (c.€5 billion out of €30 billion) which is, of itself, pretty significant and substantial.  But with 80 per cent of Corporation Tax coming from foreign-owned MNCs we have enough evidence of concentration risks without the need to be exaggerating their contribution to other tax headings.

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Why is the Irish “average wage” in the OECD Taxing Wages so low?

A few weeks ago the OECD published the 2018 update of their Taxing Wages publication.  There is plenty in the report worth chewing over but one minor issue that arises is the level of the “average wage” benchmark used for Ireland.

It doesn’t really appear to be anything too noteworthy.  It rises fairly rapidly up to 2008 (the figures are nominal so no account is taken of inflation), drops in 2009, has been edging upwards for the past three or four years or so, and is put at €36,800 for 2017.

But what about when we look at it in a comparative context?  OK, an international comparison  isn’t as straightforward as looking at a single country through time but we can overcome some issues if we look at countries that share a common currency. 

Here are the nominal average wages used for 2016 for a group of euro-area countries.

• Netherlands €50,120
• Germany €48,300
• Belgium €46,528
• Austria €45,073
• Finland €43,716
• France €37,906
• Ireland €35,430

So, we still haven’t adjusted for prices but some of the gaps here are very large.  Is the nominal average wage in Ireland 27 per cent lower than Germany and 29 per cent lower than The Netherlands?

The OECD also has an Annual Wages publication which uses aggregate data from the national accounts to work out an average wage.  As the notes say:

Average annual wages per full-time equivalent dependent employee are obtained by dividing the national-accounts-based total wage bill by the average number of employees in the total economy, which is then multiplied by the ratio of average usual weekly hours per full-time employee to average usually weekly hours for all employees.

So what does this tell us?  Here are the 2016 averages from this dataset.

• Ireland €51,336
• Netherlands €46,709
• Belgium €43,097
• Austria €41,421
• Finland €41,209
• Germany €38,302
• France €36,809

Of the selected group Ireland has gone from last to first with a 44 per cent rise in the estimated annual average wage as measured using the national accounts versus that used in Taxing Wages.  For most of the other countries the difference is only a few per cent – bar Germany where the national accounts show an average that is over 20 per cent lower.  Still by far the greatest absolute difference is for Ireland.

So,what explains it?  Perhaps it is coverage.  The national accounts cover the entire economy where the Taxes Wages figure is derived from NACE sectors B to N, i.e. the business economy which excludes state-dominated sectors such as education and health. But this coverage is the same for all countries.

The answer lies in the annex of the Taxing Wages report. 

Table A4 shows the method used to calculate the average wage.  One piece is the type of workers covered.  There are columns which show whether supervisory or managerial workers are included.  There are 36 countries covered in Taxing Wages and 34 of them include both of these types of workers, many of which we can assume would be in the top half of the earnings distribution. 

Which countries do not have them included when the average is calculated? Turkey and Ireland.

Part-time workers are another category that get varying treatment across countries.  Some countries leave them out altogether and only include full-time employees when working out the average.  Other countries include them but do so on a full-time equivalent basis such that their earnings are included but are scaled up as if they were a full-time employee.  There are six countries who include part-time employees in the calculation but do so on the basis of their actual annual earnings as part-time workers.

In their notes the OECD say:

The worker is assumed to be full-time employed during the entire year without breaks for sickness or unemployment.  However, several countries are unable to separate and exclude part-time workers form the earnings figures (see Table A.4). Most of them report full-time equivalent wages in these cases.  In four countries (Chile, Ireland, Slovak Republic and Turkey), the wages of part-time workers can neither be excluded nor converted into full-time workers (for example, an OECD Secretariat analysis of available Eurostat earnings data for selected European countries has show that include part-time workers reduces average earnings by around 10%).

So, the Irish figures used in Taxing Wages exclude supervisory and managerial staff, and include part-time workers on an unadjusted basis. 

What would the Irish figure be if it was estimated in line with the practice for most other countries?  Figures on that basis are available from Eurostat’s Structure of Earnings Survey though it is only available every four years.  The averages (with part-time employees given on a full-time equivalent basis) for sectors B to N are given as:

• 2002: €33,320
• 2006: €40,761
• 2010 : €42,111
• 2014: €44,700

This would put Ireland pretty much in the middle of the set of countries used above. 

Would it make a difference if the 2017 average wage used for Ireland was €45,000 rather than €36,400?  It probably would.

The OECD show that a single person on the average wage in Ireland has taxes and social insurance deductions of just under 20 per cent of their gross wage.  If this calculation was done using an average of €45,000 then the deductions would be 25 per cent of gross wage. 

This is part of an infographic the OECD used to promote the publication of Taxing Wages

The OECD average is given as 25.5 per cent for 2017 and Ireland is included in the group of “low-tax” countries with tax rates for a single worker on the average wage of less than 20 per cent.  If an average wage was used that better reflected the actual outcomes in Ireland, in line with the methods used for other countries, then Ireland would be pretty much bang on the OECD average and would not be flagged (literally) on such infographics. 

Such a change would probably have limited impact on the estimated progressiveness of the Irish income tax system but it would change the range of values that are currently included in the analysis.  The OECD analysis extends up to earners on 167 per cent of the average wage.  This is around €60,000 with the average currently used but would be €75,000 if that was increased to the value proposed here.

If €45,000 was used for the Irish average wage (which the available data would support) then Ireland would not be down towards the bottom of charts like this.  This calculator puts the tax rate on a single person earning €45,000 in 2017 at 25 per cent.

If a more realistic average wage was used, Ireland would pretty much be the same as the OECD average (and rise maybe ten places higher) in the above chart.  So why is such an unrepresentative average wage used for Ireland in this important report? Tweet

The same rates of tax? Yes, but for very few.

On last Monday’s Claire Byrne Live, commentator Eamonn Dunphy made the following comment:

“As we do in Ireland, the French pay a high rate of tax but in return they receive the kind of services that the average Irish citizen can only dream of.”

The only evidence to support this was some limited figures from a two-earner family with children in both Ireland and France.

The top figure is each case is “joint income” while the bottom figure reflects “tax and PRSI after tax credits and pension contributions” for the couple living in Ireland (on the left) and “income tax and social insurance” for the couple living in France (on the right).  It is also possible that the comparison is clouded as being between public and private sector workers.

A major issue is that these households cannot be considered representative – they are from the top of the income distribution and probably in the top decile of the distribution.

Ros says:

“I believe the taxes we are paying should be sufficient to provide a ‘world-class’ public service unfortunately it doesn’t seem to be that way it seems our taxes are being used to pay for other things.”

The suggestion in the discussion was that earners in Ireland were paying similar taxes to those in France but getting far less in return.  The reality is somewhat different.  The truth is that most earners in Ireland pay far less income tax and make far lower social contributions than their French counterparts.  The only cases in which this is not true is high earners and that was the only “evidence” presented.  And this ignores employer’s social insurance contributions which are about three times higher in France than in Ireland.

Here we will look at the impact of the tax and transfer system on eight household types using the Tax-Benefit Calculator of the OECD.  The latest year of the calculator is 2012 but there have not been fundamental changes in how each country tax income in the interim.  All the data used here is taken from the calculator so queries can be sent to the OECD!

The following Average Industrial Wages (AIW) are used for 2012:

• Ireland: €32,514
• France: €36,248

The household types for which a measure of “effective tax rates” are presented for incomes ranging from 50-200 per cent of the AIW are:

• Single Person, 0 Children
• Single Person, 2 Children
• Couple, 1 Income, 0 Children
• Couple, 1 Income, 2 Children
• Couple, 2 Incomes, 0 Children (Income 2 = 67% AIW)
• Couple, 2 Incomes, 2 Children (Income 2 = 67% AIW)
• Couple, 2 Incomes, 0 Children (Income 2 = 167% AIW)
• Couple, 2 Incomes, 2 Children (Income 2 = 167% AIW)

First are two charts for a single person, one with no children and then with two children.  The income range in Ireland is €16,257 to €65,029 while for France it is from €18,124 to €72,495.  At almost all incomes levels the impact of the tax and benefit system is much less in Ireland than in France. 

Up to 110 per cent of the AIW it means that net pay is higher in Ireland even though gross pay starts out lower.  For example at 110 per cent of the AIW, gross pay in Ireland is €35,766 and in France is €39,872.  Net pay is calculated to be €28,301 in Ireland and €28,131 in France.

The progressive nature of the Irish system means that the gap between the rates narrows and is all but eliminated at 200 per cent of the AIW.

For a single person with children the gap at lower incomes is even more pronounced.  For instances where the earner gains from the tax and benefit system (due to Child Benefit or the Family Income Supplement in Ireland) the rate is set to zero rather than show negative rates.  The gap below 100 per cent of the AIW is even greater than shown above.  Again the gap is eliminated at high incomes. 

Next we look at married couples with one income.  The income ranges are as for the single person charts above.  The story is largely the same: a large difference at low incomes levels which is eliminated at high income levels.

The next two charts concern a dual-income household where the second income is 67 per cent of the AIW.  For Ireland the combined income ranges from €38,042 to €86,814 while the French figures range from €42,410 to €96,781.

At a gross pay level of €60,000 a 2-earner, 2-child couple with in Ireland will have a net pay around €6,800 lower after taxes and benefits.  In France the gap would be €13,600.

Finally we come to the higher earners.  Here the second income is 167 per cent of the AIW.  The income range for Ireland is €70,556 to €119,328 and €78,675 to €133,029 in France.  For both the no child and two children couples the rate in Ireland is lower and the gap is small at the upper end of the range.

So, yes there are some people in Ireland who do pay a similar high rate of tax and social insurance to earners in France – those with high income.  The vast majority of people pay much lower rates than earners in France. 

What do the French do with all this extra money they collect from people? They give it back to them in pensions, with those who paid the most getting the most back.

The French health system also got an airing.  France has a universal health system.  This does not mean it is free; it means everyone is treated the same.  The French system can be summarised are “pay and get reimbursed”.  Everyone pays the (regulated) prices for medical services and then is partially reimbursed.

A typical visit to a GP costs €23 up front with €16 later reimbursed to the patient.  The net cost is thus €7  - for everyone.  For medicines, the standard reimbursement is 65 per cent of the cost, though the reimbursement is applied by the pharmacist rather than subsequently.  Again everyone faces the same prices.  More details here.

In Ireland we have a binary system where some patients face zero, or near zero, prices and others face the full prices (though can get some reimbursement through the tax system).  Free comes at a high cost as was usefully explained a number of years by a public health nurse in a letter to the Irish Independent.

We can have a “French-style” system in Ireland but it must be recognised what it would entail:

• The vast majority of people (i.e. except high earners) paying much more in tax and social insurance, and
• A large amount of people (the 1.9 million with medical cards) facing a price for medical services that were generally “free”.
• Using a good part of the social contributions from high-earners to fund contribution-based pensions which go largely to high earners.

There was no mention of these details last Monday though.

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Ireland’s Regressive Tax System

A recent study from the Nevin Economic Research Institute looked at the combined effective rate of direct and indirect taxes on Irish households along the income distribution.  The headline results are summarised in this chart.

From the fourth decile up the results indicate that the Irish tax system is progressive.  The first three deciles run counter than this though with the first decile notable in particular because it has the second highest reported effective tax rate.

The lowest contributions are in the third and fourth deciles and we have previously looked at the composition of the households in those deciles (albeit using the SILC rather than HBS as used by the NERI study).

So what can we say about these estimated tax burdens.  The following table gives the estimated nominal amounts paid by each decile.

The estimated average tax burden is €12,900 per household.  According to the Census taken in April 2011 there were 1.7 million households in the country.  Thus the total amount of tax included in the effective tax rates is €12,900 x 1.7 million = €21.9 billion (of which €12.5 billion is “direct” and €9.4 billion is “indirect”).  That is a lot of tax but it is around half of the total tax actually collected in 2010.  The 2010 tax take is summarised in this table.

Of course, the incidence of taxation is incredibly difficult to determine.  Direct taxes are deducted from income but even that is not enough to isolate the economic incidence of the tax.  Do employers need to pay a higher wage to attract workers from a abroad in locations with high income taxes?  This is an issue in various soccer leagues.  Determining the exact incidence of indirect taxes is almost impossible.

If a household buys something for €123 that includes VAT at 23% then the amount of VAT in the price is obviously €23.  However, this doesn’t mean the purchaser paid the full amount of VAT.  It depends on what the price would be in the absence of the VAT.

If the VAT was eliminated the price might fall to, say, €110.  It is incorrect to say the household has paid €23 VAT when the price absent a VAT would be €110.  In this case the retailer, or some other element along the production chain, has absorbed part of the VAT.

The NERI report covers €5.7 billion of VAT (€3,360 x 1.7 million) as opposed to the €9.9 billion actually paid but it is not stated why this gap is present.  It could, in part, be because of VAT paid by businesses not fully passed on in the price.  Of course, this will be reflected in lower profits and dividends from the business so the burden of the taxation will ultimately be borne by households as is the case for all taxes.  Some of those households may be outside the country as with Corporation Tax with around 75% of the total paid by foreign-owned companies. 

There will be many small businesses who would regard the rates, excise duties and other taxes which they might not be able to pass on through prices as coming out of their income.  Of course, there will also be many cases where rates, duties and other taxes are put into the price but are not explicitly listed.  However, in the sense that these may affect all households equally it may not alter the overall results.  Then again they may not.

Returning to the household level it is worth looking at the income and expenditure figures for each decile.  The tax rates shown in the first chart above are as a percentage of gross income while the dominance of indirect taxes for the lower deciles means that the amount of tax paid is, in the main, a function of expenditure.  This table from the report summarises these.

One of the notable features is that average expenditure of households in the lowest decile is almost two times greater than their disposable income.  This is also true for the second, third and fourth deciles though not to the same extent.This is not an unusual feature of household surveys and the following is noted by the CSO in their publication of the 2009/10 Household Budget Survey:

There are many reasons why expenditure may exceed income in lower income decile households and this is a common experience internationally in income and expenditure surveys. Households with recently unemployed household members may draw on savings to maintain their expenditures. Self-employed consumers may experience business losses that result in low incomes, but are able to maintain expenditure by borrowing or relying on savings.  Third level students may get by on loans or savings from summer employment, retirees may rely on savings and investments. In addition, across all deciles there may be an  under-reporting of certain categories of income (e.g. shadow economy employment income).

On the income measure in the HBS the CSO note that:

The HBS [.] calculates income on the basis of the “current income level” of the individual without adjustment for employment activity over the year in question.

The HSB is a weekly survey rather than an annual one with respondents reporting their income and expenditure over a two-week period.  Is it appropriate to calculate an effective tax rate using expenditure now when the income may have been earned previously? 

In the 2009 SILC the average disposable income of households in the lowest income decile (as measured over a year) was €11,000, around 12% higher than the equivalent figure in the HBS.  For the top decile the SILC has a figure of €118,300 versus €119,500 in the HBS, a difference of 1%.  The HBS may not the optimum instrument to measure income but it is good at what it is designed to measure: expenditure.  Here are the expenditures, estimated indirect tax burdens and effective tax burdens as a percentage of expenditure by decile.

Although VAT has some progressive features with most necessities zero rated it can be seen that the proportion of expenditure accounted for by indirect taxation is inversely related to expenditure.  The greater the level of expenditure the lower is the proportion taken in indirect taxes.  This is likely due to consumption patterns, particularly in relation to high excise duty goods, and also the disconnect between some indirect taxes and expenditure such as the television license, credit/debit card levies and annual motor tax to a certain extent.

Although there may be difficulties measuring it there can be little doubt that indirect taxation in Ireland is regressive.  Whether it is sufficiently regressive to offset the very high progressiveness in direct taxation is less clear cut.  Finally, the CSO also give a breakdown of the income by direct income and state transfers for each decile which can be used to infer that Ireland’s overall tax and transfer system is progressive.

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Implicit Tax Rate on Labour

Much of the recent emphasis has been on the corporate income tax, but the Eurostat Tax Statistics Annual provides insight on all taxes.  Here are Eurostat’s implicit tax rates on labour for each of the 27 member states in 2011.

Ireland is right down towards the bottom with the main reason for the difference being the lower rates of social insurance contributions and, in particular, employer social insurance contributions.   The chart offers nothing on the pattern of the implicit tax rate on labour at different wage levels.  Ireland has a very progressive system of Income Tax with low rates (in relative EU terms) on low/middle incomes and average rates and possibly even above average rates (in relative EU terms) on high incomes.  Ireland has low social insurance contributions, employee and especially employer, at all income levels.

The implicit tax rate on labour is explained on page 284 and is summarised in the following box and definition:

The ITR on employed labour is defined as the sum of all direct and indirect taxes and employees' and employers' social contributions levied on employed labour income divided by the total compensation of employees working in the economic territory (see Box F.2).

The ITR on labour is calculated for employed labour only (so excluding the tax burden falling on social transfers, including pensions). Direct taxes are defined as the revenue from personal income tax that can be allocated to labour income. Indirect taxes on labour income, currently applied in some Member States, are taxes such as payroll taxes paid by the employer.

The compensation of employees is defined as total remuneration, in cash or in kind, payable by an employer to an employee in return for work done. It consists of gross wages (in cash or in kind) and thus also the amount paid as social insurance contributions and wage withholding tax. In addition, employers' contributions to social security (including imputed social contributions) as well as to private pensions and related schemes are included. Personal income taxes and social security contributions paid by EU civil servants to the EU Institutions are excluded. Compensation of employees is thus a broad measure of the gross economic income from employment before any charges are withheld.

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Net Income changes since 2008

Here is a summary table of changes to net income at different gross annual incomes since 2008.  There is two figures for 2009.  The first corresponds to Budget 2009 introduced in October 2008 and the 2009* figures are the result of the Supplementary Budget introduced in April 2009.

All the figures are derived from this tax calculator which is the source of any errors and omissions.  The figures are based on a single, private-sector, PAYE worker aged under 65 who does not have a medical card.  No allowance is made for pension contributions, medical expenses or the like.  The table is merely to highlight some of the relative changes that have occurred in net pay.  Net pay is the starting gross figure in each column after the deduction of Income Tax, the Universal Social Charge (or the Health and Income Levies as appropriate) and PRSI.

As can be seen a worker on €15,000 has seen their net pay fall by €399 as a result of the introduction of the USC in Budget 2011.  This represents a drop of 2.7%.  The reductions increase through the income distribution.  At an income of €250,000 the reduction is just over €20,000 leading to a 13.3% fall in net pay. 

Around two-thirds of this reduction resulted from the measures introduced in the April 2009 Supplementary Budget.  The changes were a reduction in the thresholds and a doubling of the rates for the Health and Income Levies as well as an increase in the (now abolished) PRSI ceiling.  Some details of these changes are here.  The Income Levy had only being introduced the previous October and the two levies were subsequently merged into the Universal Social Charge in Budget 2011.

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Who benefits from Mortgage Interest Relief?

The Statistical Report of the Revenue Commissioners has a chapter on Income Distribution Statistics.  Within that Table IDS15 gives some details on the relief given for interest paid on home loans – Mortgage Interest Relief (MIR).  Here are the totals from that table.

The total amount of MIR allowed in 2010 was just under €280 million, with an average relief of €850 given to the 328,000 or so recipients.  The amount has fallen in recent years and was as high as €700 million in 2008 when the ECB rate peaked at 4.25%.  It has since fallen to 0.75%.

The final column shows that the amount of relief granted generally increases with income and the highest average going to those with an income over €275,000.  Although there are limits to the amount of relief that can be claimed, it is clearly a function of the size of the loan.   Those on higher incomes, on average, have bigger loans.

Around €20.5 million of relief is granted to Income Tax cases with an income over €100,000, though issues of jointly-assessed Income Tax returns, separately-assessed married couples and the tax case to which the relief deter definitive judgements.

It can be noted that at €279 million the amount of relief granted is less than the amount expected to the collected by the Local Property Tax this year (€250 million), and that even next year, when the full rate applies, the average MIR of €850 will be in excess of the property tax bill that these mortgaged home-owners will face.  MIR is due to be phased out by 2017.

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Effective Tax Rates

The tax system and its nuances is a frequent topic in the public discourse.  A fertile area for such discussions are the headline, marginal and effective income tax rates.  In particular, emphasis is put on the Personal Income and Corporate Income tax rates. 

The headline rates of Personal Income Tax are 20% and 41% and the headline rate of Corporation Income Tax is 12.5%.  The top marginal tax rate, including USC (7%) and employee PRSI (4%) is 52% for individuals.  Non-PAYE earners face a marginal rate of 55% as there is an additional 3% USC levy on self-employed income over €100,000, while public sector workers above €60,000 have a marginal tax rate of 63.5%, inclusive of the ‘pension’ levy.

The Annual Statistical Reports from the Revenue Commissioners provide lots of useful information on effective tax rate.  These are taken from the Income Tax and Corporation Tax elements of the 2011 report which provide figures for the 2010 tax year.

The figures for Personal Income refer just to Income Tax paid at the 20% and 41% rates and exclude PRSI and the Income and Health Levies which were also paid in 2010 as well as other Income Taxes such as DIRT. 

The pattern of effective Personal Income Tax rates with income are reasonably well understood.   The effective Income tax rate is zero up to around €17,000 and remains below 10% up to €40,000.  As income rises it rises to around 25% for incomes above €125,000 with the highest effective income tax rate around 30%. (PRSI and USC are additional to this.)  Details using preliminary 2011 data are in this table.

Here is a table that shows the pattern of the effective Corporate Income Tax rate through the range of Net Trading Income, which is found after certain allowances (losses carried forward, capital allowances and other deductions) have been subtracted from Gross Trading Profit.

Aside from companies with negative or very small net trading income (< €25,000), the lowest effective corporation tax is for companies reporting a net trading income of €10 million or more.   

There are around 45,000 companies in total in the figures and 32,000 are in the first two categories above.  There are around 500 in final category and 1% of companies paying corporation tax contribute 77% of the total amount paid.  These companies pay an average amount of €7.5 million of Corporation Tax.

Why does €70.0 billion of gross trading profits (and another €0.8 billion of balancing charges) yield only €4.2 billion of corporation tax?  There are various adjustments that are made to gross profit from any year to get the taxable profit for that year.  Here is a summary of the tables from the Revenue’s release.

Any proposals to raise the effective Corporation Tax rate without changing the headline rate of 12.5% need to address the deductions set out above.  Here is a similar table for Personal Income Tax, this time from the Revenue’s report on Income Tax.

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