Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

Income and Income Tax Inequalities in Ireland-New Evidence and Further Illustration of the Progressivity of the Irish Income Tax System

Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

Income and Income Tax Inequalities in Ireland-New Evidence and Further Illustration of the Progressivity of the Irish Income Tax System

Article excerpt

1. INTRODUCTION

This paper seeks to contribute to the research on income inequality in Ireland and the progressivity of the Irish income tax system by presenting new evidence on the extent of income inequality over the past decade and the degree of income tax inequality or the extent to which the total income tax burden is accounted for by higher earners. The results stem from new analysis of the Gini coefficient applied to publicly available (grouped) data on the distributions of income and income tax from the Revenue Commissioners to shed light on the following questions:

* Has income inequality risen or fallen since the crisis (from 2007)?

* How has the burden of income tax been distributed since the crisis and, in particular, has the burden fallen more or less heavily on higher or lower earners compared with before the crisis?

* Related to this is the progressivity of the Irish income tax system and how this might have changed in recent years, following the introduction of the austerity measures to address the deterioration in the public finances stemming from the crisis.

We also explore whether income and income tax inequalities trend cyclically, and carry out parametric analysis of the Irish income distribution using classic probability distributions, which may be of interest to researchers working on parametric modelling of the income distribution, including for simulation purposes. In a progressive income tax system, we may expect the Gini coefficient of income tax to be higher than the Gini coefficient of gross income, meaning that higher income earners account for a larger share of all income tax compared with their share of all income. In other words, while income is generally skewed towards higher earners, we would expect to observe even greater skewness in the distribution of income tax and the difference between the two measures of inequality, or Gini coefficients, may be interpreted as an (alternative) measure of income tax progressivity.

To the best of our knowledge, we estimate for the first time both types of Gini coefficient in Ireland and study their difference during the past decade, thereby contributing to the literature on the progressivity of the Irish income tax system in a novel way.

In regard to existing research, a comparison of austerity measures since the crisis in six EU countries by Callan et al. (2011) found over 30% of the overall adjustment was borne by the richest 10% of the population and approximately 70% by the richest four deciles. Ireland's adjustment was found to be the most progressive of the six countries. (2) According to subsequent research by Callan et al. (2012), the greatest losses incurred during 2009-2012 were among those with high incomes and the smallest losses were for those with the lowest incomes. In particular, estimated losses for low income deciles ranged from 4 to 6%, for middle income deciles from 7.5 to 9.5%, and 11-13% for the top two income deciles. The Organisation for Economic Cooperation and Development (OECD) (2012) found that Ireland had the second most progressive income tax system among its member countries in 2011 and the most progressive among the EU Member States (see also the Department of Finance (2013) document on the distributional aspects of recent budgets in response to the crisis).

The progressivity of the Irish income tax system internationally contrasts with the country's low overall burden of tax and income tax by European comparison. According to Eurostat (2013), total tax revenue as a proportion of gross domestic product (GDP) was 28.9% for Ireland compared with 38.8% for the EU27 and 39.5% for the euro zone in 2011; in regard to the implicit tax rate on labour, Eurostat records the rate of 28% for Ireland, compared with 35.8% and 37.7% for the EU27 and euro zone respectively in that year. Addressing the discrepancy between GDP and GNP (gross national product) in Ireland, Callan et al. …

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