Rory O'Farrell: There has been some discussion on this site about top income shares in the US. Thanks to a book, Top Incomes over the 20th Century, edited by Atkinson and Piketty (and the chapter referring specifically to Ireland by Brian Nolan), this data is available for Ireland.
The first figure shows wage shares for the top 0.1 per cent income shares. So back in 1913 for the UK, the top 1,000th of the population had about 11% of the income (or 110 times more than if everything was shared equally).
Irish data ends in 1990, but not to worry. The second figure shows income shares for the top 1 per cent for as recently as the year 2000. At the turn of the millennium, in Ireland the income share of the top 1 per cent was 10 times greater than if income was shared equally.
Both graphs show a similar pattern (though more pronounced for the top 0.1 per cent). There has been much analysis done on these patterns (in particular by Atkinson and Piketty, but also by other authors) and the general findings are as follows:
• Inequality decreased in most countries from 1914 to 1945 due to the turmoil of World Wars and the great depression. The greatest effects tend to be in countries hardest hit by World Wars.
• Inequality was kept low by progressive taxation and inheritance tax. The important role of inheritance tax is shown that Germany inequality was quite high (inheritance tax was low there), allowing capital to concentrate over generations. Also in France and the US the importance of capital income in top shares declined (despite a stable share of capital income). This was due to less concentrated capital holdings.
• English speaking countries have shown an increase in inequality since the 1990s, but continental European countries have been relatively stable.
We see the crucial role of inheritance tax. After the 1980s this was reduced in the US, so concentrations of capital ownership will probably increase over time. We can also hypothesise over whether high inequality leads to banking crises (like 1929 and 2008), and the role of equality during the ‘economic miracles’ after the Second World War.
Looking at the evidence, there are some interesting policy implications for Ireland. If we wish to reduce inequality over the long term we need long term solutions. An increased inheritance tax has the long run effect of breaking up inherited wealth concentrations. This means that control of resources will be decided more on merit and less on whose someones parents are. This will allow for a better funcioning economy. Also, if labour taxes reduce work, or capital taxes reduce investment, we need not worry too much that inheritance taxes will reduce our death rate.
Also, what was the cause of the Irish post-war decrease in inequality? Perhaps those with an interest in history can make some suggestions.
Dr Rory O'Farrell @r_o_farrell
Rory O'Farrell is an economist lecturing in TU Dublin. He previously worked for the OECD and for NERI.
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