What Now for Economic Inequality in Ireland?

Nat O'Connor: Last week, economist Thomas Piketty wowed a packed auditorium in Croke Park, with over 600 people in attendance to hear his analysis of economic inequality. But one key message from the TASC conference was that the debate must be carried forward from here.

As the Central Bank Governor, Professor Patrick Honohan, noted in his response to Thomas Piketty, the topic of income and wealth inequality is "a topic neglected to a surprising degree in most analysis of economic statistics." The Governor also noted "I appreciate the matter-of-fact concern with inequality - especially wealth inequality: I differ from those commentators who do not see the obvious policy relevance of these matters." (Professor Honohan's full remarks are here)

In terms of any policy response to economic inequality, there are three major 'equalisers' that need to be taken into account.

Firstly, good jobs are the primary equaliser for many people. A well-paying job is how many people provide themselves and their families with a dignified life. However, Ireland's economy has failed to generate enough jobs - and too many jobs are low paid, where even with full-time employment people are living in a precarious situation or in material deprivation.

The second great equaliser is redistribution of income through the combination of the tax, social insurance and social transfer systems. This system is progressive where higher earners pay more in income tax and PRSI (albeit regressive in terms of VAT and other indirect taxes, where people on lower incomes pay proportionately more). Social transfers like the state pension, Child Benefit, Rent Supplement, disability allowance, carers' allowance and other welfare payments play an important role in reducing poverty. However, too much attention is paid to the progressivity of the income tax system. While this is a good thing, it is too often seen in isolation from the whole system, which has weaknesses in comparison to other EU countries.

Thirdly, a decisive factor in the equality of 'quality of life' is public services. There are too many demands on people's net incomes in Ireland compared to other EU countries - even the UK. As a result, many people are unable to meet the cost of essential goods and services, which in Ireland include extremely high housing costs, health insurance, the world's most expensive childcare, transport and more. Nonetheless, the value of public services is that education provides opportunities for many people and public health services do mitigate risk for many people - although the length of waiting times rightly causes anxiety for those who cannot afford insurance as it is less the quality of service but the delays that are the greatest risk for those people solely reliant on the public provision of health care.

It is in public services that the weakness of Ireland's tax system is apparent. At only three-quarters of the EU average level of tax and social insurance, is it not surprising that Ireland's services do not provide to the same extent that public services do in many Western European welfare states. As a result of this 'low tax triangle' (low taxes, low service provision and higher out-of-pocket costs), Irish people have to spend more of their net income on services than they do in other countries.

The policy challenge in addressing economic inequality is how to move on all three points of the triangle at the same time: provide more far-reaching services or new services, lower people's cost of living, while of necessity raising taxation to pay for this.

In concrete terms, more far-reaching services might equate to health or education services that are simply free-at-the-point-of-use rather than coming with a slew of up-front fees, prescription charges, school book charges, etc. New services might include state-subsidised childcare or affordable rental housing for the mass market.

It requires detailed cost-benefit analysis to show whether or not expanded or new public services could reduce the cost of living for enough people to make the case for increased taxation persuasive. But the lack of exploration of this possibility is a major gap in the policy debate.

This gap in the debate is problematic because it is precisely through progressive taxation funding of public services that many European countries reduce economic inequality to an extent that Ireland does not. Taxation is not primarily about redistribution of income. In Ireland, social transfers account for less than a third of all spending. What is required of public services is distribution of opportunity, distribution of jobs and collective sharing of risk by all of society.

The counter-argument to this claims that taxes are too high and people want higher net incomes. But the tax debate leading up to Budget 2015 has been (to date) framed in the media as about the 41% higher rate of income tax. However, as TASC has demonstrated, only a third of income tax payers pay anything at this rate - and only a sixth of adults would benefit from any changes to it.

As such, the debate is currently a spurious argument about boosting economic activity through a tax change that will only benefit higher earners - not the large majority of people in Ireland.

The Economist illustrates effective tax rates on a 100,000 USD salary in a diagram here. Ireland's rate of tax and social insurance actually paid on this income level is around 35% (i.e. the middle of the chart - near Brazil and India, but below Germany or France) - and it would be far lower if Ireland's extremely low employer's PRSI was taken into account. What is really being suggested in the focus on the higher tax rate of 41% (52% when PRSI and USC are included) is that Ireland should be more like the UK or USA, countries where people on high salaries pay less income tax - and where overall economic inequality is higher than Ireland.

The progressive counter-argument always requires more evidence than populist anti-tax rhetoric. This is the argument that stronger public services and social transfers would improve the quality of life for more people - even if they had lower net income due to higher tax and social insurance to pay for those services. Moreover, more equal economies often do better. Higher social transfers means more money circulating in local economies. And stronger public services also both directly boost GDP and also can lay the foundations for stronger performance in the private sector (e.g. greater public investment in infrastructure, such as IBEC is currently calling for).

Given the strong evidence that more equal countries do better, and given the low level of Ireland's overall tax and social insurance, the balance of probability favours maintaining or increasing taxation in Budget 2015 - not reducing it. This is necessary to fund public services, social transfers and public investment, which in turn are vital to tackle economic inequality.

Dr Nat O'Connor     @natpolicy

Nat O’Connor is lecturer in social policy in UCD’s School of Social Policy, Social Work and Social Justice and part-time policy specialist at Age Action Ireland. Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

He has taught politics and social policy since 1999. He has a PhD in Political Science from Trinity College Dublin and a MA in Political Science and Social Policy from the University of Dundee. He is a Fellow of the Higher Education Academy (UK), a member of the National Economic and Social Council (NESC) and chairperson of the Irish Social Policy Association (ISPA). You can find him on LinkedIn (natoconnor) and TwitterX @natpolicy