Income inequality stable in Ireland

Income inequality in Ireland remains “remarkably stable”, according to a report from the Economic and Social Research Institute.

Income inequality has been rising in many developed countries, but Ireland’s experience has been entirely different.

The ESRI found that income inequality here was stable during the recession and the pattern continues as the country recovers.

In particular, the pre-existing structure of the tax and welfare system played a “major role” in ensuring that increased inequality in earnings did not lead to greater inequality in household disposable incomes.

Progressive tax systems provide an “automatic stabilisation” while welfare payments cushion the blow of unemployment. If inequality in earnings increases, a progressive tax system lessens the impact of increased earnings inequality on take-home pay. The ESRI found that it is these “automatic effects” that have proved most valuable in keeping income inequality in Ireland stable.

Michael Noonan, the outgoing finance minister, claimed it was his policies that led to the sharpest cut in inequality among the 35 members of the Organisation for Economic Co-operation and Development.

However, ESRI research found that over the 2008-13 period, policy changes only made a “small contribution” to the reduction in overall income inequality.

The detailed analysis includes the impact of changes to welfare benefits, direct taxes, and public sector pay implemented over the crisis. It found that the top and bottom groups were harder hit by the austerity measures than the middle.

Mr Noonan said Ireland’s income tax system was one of the most progressive systems in the developed world, the most progressive within the EU members of the OECD, and second-most progressive of all members of the OECD.

A progressive system ensures that the burden of taxation falls most heavily on those with a higher ability to pay, he said.

“The welfare state plays a crucial role in redistributing market incomes (that is, incomes before taxes and transfers) and in reducing the gap between richer and poorer households. Such redistribution is sizeable in Ireland’s case,” he said.

ESRI research professor and co-author of the report, Tim Callan, said its analysis of data from the CSO between 2004 and 2015 helps to identify how changes in individual incomes fit together into a pattern of broad stability in income stability.

“The role played by the pre-existing progressive tax and welfare system has been critical in helping Ireland to avoid the rise in income inequality seen in many other countries,” he said.

The report — Income Distribution in Ireland: Through Recession, Towards Recovery — runs against some of the debate in Ireland that there has been a sharp rise in income inequality in Ireland.

Prof Callan said income inequality is growing in other countries, particularly in the US and Britain, but remains quite stable in Ireland.

“Other countries have experienced increases in income inequality, but Ireland is now more toward the middle of the ranking of countries by income inequality,” he said.


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