Income inequality has reduced in Ireland over the past five years mostly on the back of the Government maintaining welfare payments, despite a collapse in revenue, according to the ESRI’s chief economist, John FitzGerald.
“The years since the bursting of the property bubble have involved an exceptionally painful adjustment process affecting all of the population. However, the fiscal policy options chosen by successive governments have contributed to an outcome where inequality in the distribution of income has actually fallen over the last five years. A major factor in ensuring this outcome was the maintenance of the welfare system, broadly unchanged, in the face of the massive increase in numbers depending on it,” said Mr FitzGerald in a paper called ‘The distribution of income and the public finances.’
“The need for increased taxes and for cuts elsewhere in the economy was greatly increased by the decision by successive governments to protect those on low-incomes who were dependent on the welfare system. This policy choice was different from that adopted in many other EU countries, where income inequality increased significantly as a result of the crisis.”
The bursting of the property bubble, in particular, greatly reduced the number of high-income earners, which again contributed to the reduction in income inequality.
The paper found that in 2007, 46% of all tax paid came from those earning over €100,000 even though they represented 25% of income. However, there has been a massive drop in the level of high-income earners over the past five years. The number of people earning over €100,00 fell by 14.7% and those earning over €275,000 fell by 28%.
The proportion of tax coming from the high-income cohort fell to 43%. The fall in the number of high-income earners meant that the burden of income tax had to be carried by those on middle incomes.
The massive rise in the unemployment rate pushed a sizeable cohort towards the bottom of the income distribution. However, the maintenance of the welfare floor provided significant support for this group of people, said Mr FitzGerald.
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