Thursday 25 December 2014

The still-hidden debt burden of Ireland's top earners

Published 29/07/2014 | 02:30

Joan Burton: deserves praise for maintaining the welfare system
Joan Burton: deserves praise for maintaining the welfare system

IMAGINE a society of 10 people, standing in a line. The first nine have incomes of €10 each in their pockets. The 10th person has an income of €100. This is an income distribution.

Imagine they vote to redistribute income more equally, taking €50 off the 10th person, and handing her back €5. Now the first nine people have €15 each, and our 10th person has €55.

It's a fair bet she's not too impressed with the situation. Everyone has benefited except her.

But this society is much more equal than it was before, in that the distances between the lowest, middle and top incomes is much less than it was previously.

Now imagine our 10th person, rather than having €50 taken from her pocket through taxation, saw half of it evaporate because it was based on property-related earnings. Now everyone else remains at €10, but her income drops from a €100 to €50.

The society is still more equal but no one has benefited – the destruction of the person at the top's income has made all the difference.

The combination of redistributive policies – taking from the rich and giving to the poor – and the destruction of incomes for those across Irish society has resulted in a large change in income inequality as a consequence of the 2008 crisis.

Redistributive policy matters far more than people generally realise. A new study from the Economic and Social Research Institute's Professor John FitzGerald shows the effect of austerity on the middle classes in the form of tax increases reducing their disposable incomes.

The maintenance of the welfare system, for which Tanaiste Joan Burton deserves some praise, allowed those at the bottom of the distribution to have their incomes stay roughly at the same place.

However, the destruction of the extremely large incomes of those at the top has had the effect of collapsing the distance between the rich and the poor, but the loss of taxable income from these people, who paid for 46pc of all income tax in 2007, had to be made up by those in the middle, who still have their incomes.

It's as if the two thought exercises I described above happened at the same time, the double-hit at the top and the middle reduces income inequality, yes, but no one feels particularly more egalitarian, and, in fact, the different parts of the income distribution have suffered in different ways.

The picture that Prof FitzGerald paints is, in part, of a redistributive system doing largely what it should be doing when times are hard – stopping people's incomes dropping to zero when they hit hard times, allowing the Government's finances to blow out into the red for a while until conditions improve, and then, as the numbers of those unemployed reduces, repairing the finances of the State. The big asterisk in the findings relates to debt levels, as Prof FitzGerald indicates.

You can have an income of €100,000 per year, but if you can't service your debts, you don't feel particularly rich. Someone with €50,000 per year and no debt might have a higher disposable income, in fact.

Debt, and particularly households in financial distress, might look well off based only on their incomes. Knowing something about their debts, and in particular the types of debt they have, matters hugely.

Like many economists, I'm looking forward to seeing the Irish results of the household finances and consumption survey, which connects debt and incomes for households, in the autumn. This data set will be crucial for policy development.

Income is less than half the story. Debt matters, but wealth matters more. The work of Thomas Piketty and his co-authors shows the evolution of wealth across the globe over a long period of time, and this trend surely includes Ireland. We have fairly poor data on the stock of wealth in this country but I would be amazed if a vast amount of Ireland's wealth is not tied up primarily in property and business assets.

The distribution of wealth is a different matter, and the story of what happened to wealth from 1996 to today, and the effect of saving private levels of wealth using public finances, has yet to be told.

Stephen Kinsella is senior lecturer in economics at the University of Limerick.

 

Stephen Kinsella

Irish Independent

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