There have been some outrageous and hilarious things said in this economic debate. I don’t know how economic historians will come to rank them. But surely at the top must be the claim that the rich have paid a ‘far higher price’ than other groups in society as a result of the economic downturn. You could dine out on that one for a long time.
This issue is not academic. In the run-up to the budget progressives will put particular emphasis on increasing taxation on high-income groups. There are two good reasons for this: first, because they have a lot of money and, second, because it will have a less deflationary impact on domestic demand than, say, taxing low-income groups or cutting public spending.
But would it be fair? If they have paid a ‘far higher’ price than other groups during the last couple of years are we in danger of victimising this hard-done-by group of individuals? Let’s look through some of the data, bearing in mind that information on income and wealth is sketchy and dated.
Losing one’s job is about as painful as it gets (apart from not being able to find one). We’re likely to find high income earners among the employer/professional groups. According to the Household Budget Survey, this group earned over 50 percent more than the national average. So how has the recession been for them? Not good, of course; but nowhere near as bad as other social groups.
No one wants to see employment losses in any category, but you’re more likely to escape the worst if you are in the higher-income groups. This is pain, but nothing like the rest of the workforce.
Unfortunately we don’t have up to date data on income by deciles or social groups. So we’re going to have to do some knitting and hope the result is wearable.
We do know from the EU Survey on Living Conditions (SILC) that the highest income groups disproportionately benefited from income rises in the last few years. Whereas the average household saw their weekly income from work increase by €191 between 2003 and 2008, households in the top 10 percent benefited by €912. In good times, high income groups benefited the most. Can we assume that in hard times they will suffer the least?
The ESRI takes two measurements: aggregate wages and aggregate non-agricultural other income (non-farming self-employment, investment and capital income, etc.). Aggregate refers to the total amount in the economy and not an average. The ESRI estimates that between 2007 and 2011:
- Aggregate wages will fall by €10 billion, or 12.9 percent. This is due to a combination of unemployment, falling wages and reduced hours.
- Non-wage income, however, is expected to increase over this period: by nearly €2 billion, or 10.6 percent.
Can we deduce that this will benefit higher income groups? Reasonably so. SILC tells us that in 2008, the top 10 percent earned over 41 percent of all self-employment and other income.
If these estimates and proportions hold, then those at the higher end (at least when it comes to non-wage income) will have more than recovered and actually increased their income.
This doesn’t seem like too much pain.
It is uncontroversial to state that wealth, in particular financial, is concentrated in the hands of a few. How few and how much? The Bank of Ireland Private Banking states that the top 1 percent own 33 percent of financial wealth – but this is their estimate, based on UK patterns. Unfortunately, we have no government data. However, this doesn’t seem too far off considering that:
- In the US, the top 1 percent own over 50 percent of financial wealth
- In Spain the top 1 percent owned over 27 percent
So 33 percent is not too far off the pace. Even if it’s the top 2 percent, then we’re still looking at high concentration. What has been happening in the financial wealth areas (i.e. financial property for those who hanker after a ‘property tax’) and what should we expect to happen. We have the CSO and Goodbody estimates to help us out.
Just as we saw with non-wage income, we find that net financial assets will recover quickly after taking a substantial fall in 2008. If the Goodbody estimate holds, financial assets will exceed the pre-recession values, rising by nearly €50 billion from the 2008 low. This is another area where it is difficult to see much pain.
The Impact of Levies
Much emphasis has been put on the marginal tax rate that high income earners face with the increase in income and health levies and the PRSI threshold in the April 2009 budget.
8.5 percent has been added on to the marginal tax rate at the upper end. Surely, this could lead to all sorts of bad things – tax avoidance/evasion, capital flight, reduction in future investment. Not really. It only means a more even playing field.
The marginal tax rates – the rate at which an extra Euro is taxed (income tax plus levies) – are pretty much the same between average and high income earners. Ditto for the effective rate of the levies (the actual amount of levies paid as a percentage of income). If this is ‘pain’, then this is pain that most taxpayers have laboured under.
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All the indicators show that high income groups have suffered relatively little pain (e.g. less job losses) and that they will recover quicker than the rest of the population; that the increases in levies only means that they are paying the same as average income earners.
Still, the myth of progressivity in the tax system persists, propagated for strategic purposes. In the run-up to the budget, progressives will be met with the argument that high-income groups have already been tapped enough; any more and there could be negative economic consequences. Therefore, we should look to other areas: spending cuts, bringing the low-paid into the tax net, water charges, etc. And if more deflation is the price of sparing the rich, then so be it.
The rich have paid a far higher price? That’s what some of our esteemed commentators say. But as Professor John Fitzgerald pointed out,
‘It doesn’t feel like that.’