Tuesday 25 October 2016

Tax records a trove of information on how people move up and down income ladder

Published 10/12/2015 | 02:30

'There has been little change in inequality of income (annual earnings) over recent decades. And we can say that with a high degree of confidence because quite a lot of hard data exist'
'There has been little change in inequality of income (annual earnings) over recent decades. And we can say that with a high degree of confidence because quite a lot of hard data exist'

How wealth is spread is an important matter for all societies. Even more important is how fairly opportunities to become wealthy are spread.

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Last Friday, some fascinating and grounding-breaking new findings about equality in Ireland were published which tell us more than we have ever known before about how people move up and down the income ladder over time.

In an unprecedented move, the taxman gave research boffins access to Revenue records (don't worry - your tax affairs remain private as the records were all made anonymous). In short, we now have a better idea of the degree to which people who start on the lower rungs of the earnings ladder end up at the top, and how many among the already rich fall down the income ladder.

Before looking at the new findings, let's say three big things about the hot topic of income and wealth equality for context and for clarification, not least because there is an awful lot of guff spoken about the subject.

First, Ireland is very normal. Compared to the rest of the developed world, the spread of both income and wealth is about average when compared to peer countries.

The second big thing to note about equality is that most of our peer countries are experiencing less of it. Within many developed world countries over recent decades, the trend has been for more of the gains of economic growth to go to the richest.

In this regard, Ireland partly bucks the trend. There has been little change in inequality of income (annual earnings) over recent decades. And we can say that with a high degree of confidence because quite a lot of hard data exist.

In terms of wealth (the value of property, savings, pensions and the like), we can be less confident in the trend because there are fewer figures.

But of the two years for which numbers exist - 1987 and 2013 - it appears as if wealth became more unevenly shared in Ireland between those two years.

The third important point is that on a global basis the world is becoming fairer. If that seems to partly contradict the second point about rising inequality in most developed countries, it doesn't. The main reason that global inequality is falling is because many poorer countries are catching up with us in the West. The acceleration of economic growth in recent decades - from Asia to Africa to Latin America - is narrowing the gap with the West that opened up in the 19th century.

With that somewhat mixed big picture as background, the smaller picture of Irish society painted by last week's new research is, well, quite mixed too.

The analysis of vast amounts of tax data in the years up to 2012 was done by researchers at the Revenue Commissioners and the OECD, a think tank in Paris. Their work corroborates what statistical surveys have shown regarding income distribution, ie. that it has been fairly stable over the past decade and more.

But the ground-breaking aspect of this analysis of the Revenue data is manner in which it tracks people over time.

Hitherto, a big gap in our understanding of equality was how people moved from being poor to rich and vice versa. For the first time, we can assess the degree to which the rich stay rich and the poor stay poor.

The new study provides evidence that there is less upward mobility from the very bottom than might be desirable. Positively, almost one in four of those in the bottom tenth of income earners in 2004 had made it into the top half of income earners by 2012. But much less positively, the same proportion of that group was still at the very bottom after eight years.

This shows that quite a large group is stuck at the bottom of the pile.

Worse still, the size of that group is likely to be greater than this study suggests because many on welfare don't have to file tax returns and are therefore not captured in Revenue data.

All of this can only add to concerns about an underclass in Irish society that is trapped in a badly designed welfare/tax/training system which does too little to help, educate, cajole and incentivise those at the bottom to move up the ladder.

And what about the other end of the spectrum? If we look at the top 10pc of earners, we see considerably less mobility downwards than there is upward mobility from the bottom.

If we recall that one in four of the poorest were still in that sorry position over the eight-year period, a little over half of the richest managed to remain in that happy place over the same period. And of those who fell out of the top 10pc, only one in 12 dropped into the bottom half of earners.

So if the old saw that the rich stay rich is well wide of the mark, we can say that the richest in Ireland in recent times had a better than even chance of staying in the highest-earning tenth of the population.

Tax revenue records contain a treasure trove of information about society.

Provided people's privacy is protected - something that is perfectly achievable if done correctly - the scope to understand better how society has changed over time is huge if more research is done on who has been paying tax, and in what amounts.

That Ireland has been at the forefront of this new approach is positive.

Other countries should follow suit so that a comparative picture can be developed - trends in one country become an awful lot more meaningful when they can be compared with those elsewhere.

This study is an excellent start. Much more remains to be done.

Irish Independent

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