Joint Committee on Education and Social Protection debate -
Wednesday, 21 Jan 2015

Impact of Social Protection Payments on Income Distribution: Discussion

Chairman

I thank all our guests for attending today. The topic for discussion is the impact of social protection payments on income distribution.

Before we commence, for the information of our guests, I must read a note on privilege, although many of them will probably be familiar with it. I draw to their attention that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If, however, they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable. The opening statements submitted to the committee will be published on its website after the meeting. Members are reminded of the long-standing parliamentary practice to the effect that I have just outlined.

At the request of the broadcasting services, everybody, including myself, must, for the duration of the meeting, turn off their mobile phones or switch them to flight or safe mode, as otherwise they will interfere with the broadcasting equipment. I am switching my mobile phone to flight mode and I ask that everybody does the same.

The topic of today's meeting relates to the issue of social protection payments and their impact on income distribution. The purpose of social transfers, which is an issue our committee would examine as part of our brief, is to alleviate poverty, support well-being and reduce inequalities in society by redistributing income. We know from many studies that the level of personal household income has a major bearing on issues related to people's health, welfare and opportunities that are available to individuals and, in particular, to children. Another very current issue is that income equality in itself is an objective for society because there is considerable evidence that societies with more income equality do better in many respects, including life expectancy. Considerable analysis on that has been done during the course of the recession. Many studies have been done on the issue of income distribution and the impact of budgetary measures on that, including social protection. We are having this meeting to examine that issue further.

Our committee has been examining the issue of equality budgeting. Since this committee was established a few years ago, we started to examine the issue of equality budgeting in the context of when we had our pre-budget hearing. We have had the Think-tank for Action and Social Change, TASC and Social Justice Ireland in previously on that matter. I, a few other members, including Deputy Ó Snodaigh, and the Clerk to the Committee went to Scotland to examine how they do equality budgeting there. They do it in the sense of taking account of the grounds for discrimination, which includes gender, disabilities and so on, but we have also examined it in terms of income inequality and equality. This is an ongoing topic that the committee has been examining.

To assist the committee on this we have with us delegates from the Economic and Social Research Institution, ESRI, which is represented by Professor Tim Callan and Professor Dorothy Watson, and from TASC, which is represented by Mr. Cormac Staunton. We also have Dr. Donal de Buitléir and Mr. Cormac O'Sullivan from PublicPolicy.ie, while Professor John FitzGerald is here in his own personal capacity. To commence the discussion, I invite Professor Callan to make his presentation.

Professor Tim Callan

I suggest it might serve better if Professor Dorothy Watson started.

Chairman

Okay.

Professor Dorothy Watson

I will be brief. I thank the Chairman for the introduction. I will talk briefly about a piece of research we did at the ESRI where we looked at the impact of social transfers on poverty. In contrast to what my colleague, Professor Tim Callan, will talk about, the focus of this research was on the very bottom of the income distribution and the significance of social transfers in alleviating income poverty. Therefore, the focus was very specific. The research focused on the period from 2004 to 2011. Therefore, it covered a period of economic well-being, economic growth and also the period at the beginning of the recession. I will summarise the findings under four headings: looking at changes in the significance of social transfer income for households, changes in the effectiveness of social transfers in reducing income poverty, variations in this respect across life cycle groups, and how Ireland in the period compared with other European countries. To give an indication of what is covered by the term "social transfers", it includes the State means-tested and non-means-tested social welfare payments, and it also includes child benefit and pensions, whether those pensions are from the State or from an occupational pension scheme.

Looking at changes in the significance of social transfers, as we might expect as a result of the recession, social transfers became much more important as a component of household income over the period.

In 2004 for instance, on average 20% of household income came from social transfers, but by 2011 that had increased by 50% up to 30%. There was a huge increase in the significance of social transfers. If one looks at households in receipt of social transfers, because we are including child benefit and pensions, a very high percentage of households receive some social transfer income. It was already very high in 2005 but it increased from 85% to 87% in 2011. There was a more significant change in the average amount of social transfer income received by those households. It went from an average of €233 per week in 2004 to €327 per week in 2011, and that is in 2011 prices. Part of the increase was due to increasing rates of payment of social transfer payments up until 2009, and of course also, more important, an increase in the proportion of people who were receiving payments such as unemployment assistance and unemployment benefit once the recession started.

How effective were social transfers in reducing poverty? When we talk about poverty reduction effectiveness there are a couple of different ways to measure it, but one of the best measures is to look at how much of a gap there is between the poverty threshold - the level of income a household would need not to be considered income poor - and the income the household gets from non-social transfer sources, from market sources such as work, interest in dividends and so on. We call that gap the poverty gap. A measure of the effectiveness of social transfers is to ask what percentage of the average poverty gap do the social transfers bridge or close. In 2012 for instance, the poverty threshold of a household with two adults and two children would have been €473 per week, and if the family had €300 per week from work the poverty gap would be €173. We ask how much of the gap is bridged by social transfers.

Looking at the population as a whole, the reduction in the poverty gap was 84% in 2004 and increased to 88% by 2011. There was an improvement in the extent to which social transfers bridged the income poverty gap in the period. There are a variety of reasons for that but I will not go into them now. I can address them later if people would like.

Looking at different life cycle groups, what we see is that the poverty reduction effectiveness ranges from 84% for working age adults to 95% for retirement age adults. The system is very effective at reducing poverty for adults of retirement age. Part of the reason is that they are very dependent on social transfers and they are less likely to have income from work. Another factor is that we are including the non-means tested pensions as well as occupational pensions in what we consider to be social transfers. The effectiveness for children is somewhere in the middle at about 87%.

How does Ireland compare with other European countries in this respect? Because our social protection system and social system in general places a great deal of emphasis on cash benefits rather than on providing services, when we compare Ireland with other European countries in terms of looking at the impact of cash benefits on poverty reduction, we come out looking pretty good. In 2005, using the measure of closing the poverty gap, Ireland was about in the middle of the EU 15 countries. That had improved by 2010, which at that point was the latest year we were able to look at, where Ireland had moved towards the top of the distribution. In terms of poverty reduction effectiveness, Ireland compared favourably with other European countries.

To summarise, the analysis indicated that social transfers in Ireland increased in terms of how effective they were in reducing poverty between 2004 and 2011. That was mainly due to an increase in social protection spending, because a larger number of people were receiving social protection payments, in particular those related to unemployment. The effectiveness is particularly high for pensioners. Ireland compared favourably in that respect with other EU 15 countries.

Chairman

That was great. The next speaker is Mr. Cormac Staunton on behalf of TASC.

Mr. Cormac Staunton

I thank the committee for the invitation to address it. A detailed paper was circulated and I will speak about some key points. I am happy to take questions about the details in the paper as well.

To understand the impact of social protection on the overall distribution of income, we need to understand the distribution of market incomes, that is principally incomes from paid employment but also income from investments and other sources. This baseline sets the context for how social protection affects the distribution of income. Immediately we see something striking. Ireland is the most unequal country in the OECD when it comes to market incomes. This is measured using a Gini coefficient of pre-tax, pre-social welfare incomes. The next most unequal countries are Greece, Portugal, Chile and the UK.

Inequality of market incomes has been growing since the 1970s. This is not unique to Ireland. It is part of a global trend that affected most industrial economies, highlighted by the work of Thomas Piketty and others. In the circulated paper, the distribution of income by tax cases is shown in chart 1 and by adults in chart 2. From Revenue statistics we know that the top 10% of tax cases in Ireland receive 34% of all income, despite representing only 12% of the adult population. That is up from 28% in the 1970s. In terms of the distribution of income, those in the top 1% of tax cases have an average income of €370,000. The top 10% have an average income of €130,000. Many of those tax cases relate to couples so the per adult income is lower. A single person or a married person as one tax case needs an income of €75,000 to be in the top 10% of tax cases. The incomes at the top compare with an average for the bottom 90% of €27,000. It is important to understand this underlying inequality because it provides the context in which social protection payments are made. Taxes and social protection payments mean the net income inequality in Ireland is much lower than gross market income inequality, but as gross income inequality rises over time, the tax and social welfare system has to work increasingly hard to reduce net inequality to the same extent. It is also important to note that the Gini coefficient is a measure of income inequality, not income distribution or income adequacy. The Gini coefficient is measured from 100 – the most unequal – to zero – the most equal.

Taxation alone has a marginal effect on the Gini coefficient, moving it from 56.8 to 53.5, meaning that tax reduces inequality only slightly. However, social protection payments move the Gini coefficient from 53.5 to 29.9, which is a much greater reduction in inequality. The reason net income inequality falls significantly in Ireland is because social protection payments provide an income floor. There are 1.4 million weekly recipients of a social protection payment which means that 40% of adults in Ireland are on low fixed weekly incomes. More than 900,000 adults of a working age receive a weekly welfare payment. Only a fifth of social protection spending is on those who are unemployed, with the majority going to those who are retired, to children or to those who cannot work due to disability or care duties.

Because social protection is paid at subsistence levels, its impact is to swell the numbers of people at the bottom of the income distribution. In terms of income adequacy, social protection rates are in effect between €8,000 and €12,000 per year per adult compared to an average annual income of approximately €18,000 on the minimum wage or €23,000 for an adult single living wage. As well as providing subsistence to many people who have had a far lower income without social protection, these payments are vital for the functioning of Ireland’s market economy. The spending by recipients becomes consumption in the market which pays wages and taxes. If we did not have an income floor, we would have a crisis in many local economies, but because social protection rates are not linked to market forces, such as changes in the cost of living or changes in market incomes, they do not continue to guarantee the same level of subsistence over time nor do they address the underlying root causes of economic inequality. That is shown by what happened to income inequality since the economic crash. The Gini coefficient shows that income inequality was lower in 2009. That was due to the decline in higher incomes after the crash while core social protection payments provided a floor that was largely unchanged. Since then, however, we have seen evidence that the income distribution is stretching again, leaving people on social protection payments further behind. Provisional figures from Revenue show that incomes above €100,000 have risen from 2009 to 2013.

That indicates a growth in income inequality both before and after welfare payments are accounted for.

The distribution of income is one indicator of economic inequality. There is strong evidence that more equal societies do better on a range of social indicators. There is also an increasing acceptance among mainstream economists and leading economic institutions such as the IMF and the OECD that more equal economies are more stable and have better long-term growth. However, understanding the depth of economic inequality in Ireland requires us to examine other factors, including taxes, wealth and public services. In the coming weeks TASC will be publishing a report that seeks to bring together all of these factors and more, which we hope will provide a fuller understanding of the nature of economic inequality in Ireland. I am happy to take questions.

Chairman

I thank Mr. Staunton. I call Dr. de Buitléir.

Dr. Donal de Buitléir

I thank the Chairman. Evidence from the OECD shows that the distribution of income in Ireland before taxes and social transfers is the most unequal in the OECD. It is, surprisingly, perhaps a little more unequal than that in the United States.

We have the most progressive tax and transfer system in the OECD both absolutely and proportionately. As a result, the post-tax and transfer system reduces income inequality to around the OECD average. The countries with the next most progressive systems are Finland and Denmark, though these systems are considerably less progressive than ours. While the income tax system is highly progressive, the social protection system plays a very important role.

The at risk of poverty rates pre-tax and transfers is 50.3%. That was in last year's survey of income and living conditions, SILC. There was one out at 11 o'clock today which I have not had time to read so I am not sure if it has changed much in the past year. The 50.3% is reduced to 16.5% after taxes and transfers, so it is a dramatic difference.

In the case of the elderly, the State pension is very important, particularly for low income retirees who get 90% of their income from the State pension. The only source of income for 26% of these is the State pension. That is why the sustainability of the State pension is a critically important issue.

Much attention is focused on the bottom 10% of the population. This group has some puzzling features. Only 60% have medical cards compared with 74% in the third decile, that is, the third group from the bottom, and the recorded expenditure of the bottom decile is 186% of their recorded income. Their recorded income is less than the basic supplementary welfare allowance plus child benefit, where appropriate. The result is clear. Those in the bottom decile are not in receipt of basic social welfare benefits. Possible reasons for this include that they are entitled to benefits but they are not claiming them; they are not entitled to benefits because while their income is low, they fail the means test due to their holdings of assets; they are self-employed and making very low incomes or losses during the survey period; or they are in full-time education.

One of the disturbing features in Ireland is the very high proportion of workless households. This refers to households where the adults aged up to 59 work less than 20% of their total work potential during the past year. Almost one in four Irish households, or 23.4%, are in this category. That is by far the highest in the EU and is over twice the EU average of 10.7%. Even in 2008 the number was very high at 13.7%, almost one in seven. Adults in this category disproportionately have low education, are unskilled, are lone parents or carers or have a disability. This is a complex issue and we need to increase our understanding of the barriers to work affecting this group if we are to tackle the problem. I am happy to explore these issues.

Chairman

The next speaker is Professor John FitzGerald.

Professor John FitzGerald

I thank the committee for the invitation. Since the crisis hit after 2007, GDP has fallen by about 14% up to 2011, which was the bottom of the crisis, but Government revenue fell by 20%. In spite of the fall, Government expenditure was up 3%. The reason for that was welfare payments. There was a dramatic increase in the expenditure on welfare payments. It rose by about €5 billion. If the share of welfare payments had been held unchanged at the 2007 level, there would have been €9.5 billion less expenditure. If we consider that €30 billion is roughly the cuts and tax increases we have had, one third of that has gone to fund a dramatic increase in expenditure on welfare over the crisis period. By contrast, only 5% has gone to fund the interest on the bank debt.

Looking across the European Union, in the crisis countries there has been a significant increase over the same period in the percentage of GDP going on transfers, but Ireland stands out as having a much bigger increase. By contrast with, say, Greece or Spain, there was a much bigger increase in unemployment. Therefore, that tallies with the Irish data.

With regard to what happened to the income distribution, one of the problems in terms of tax revenue was that there was a wipeout of people on very high incomes, for example, in excess of €275,000. Their number was down 28%. Their average income was down 15% and their total income in that category was down 40%. The effect of this was that whereas previously a great deal of our tax revenue came from people on a very high income, their income fell. Therefore, the difference had to be made up by people on incomes below €100,000.

I will not revisit what Dr. Donal de Buitléir has said on the Gini coefficient. Everybody has said that before the tax and welfare payments, the market income is fairly uneven. We have a very uneven distribution of income, but after tax and welfare payments, we have a much more even distribution of income, and after the crisis it is marginally more evenly distributed than before the crisis. The crisis has been good in that sense for distribution of income.

To sum up, there has been a big fall in everyone's income because of the crisis. Successive Governments have allocated a huge increase in funding for welfare - approximately €9.5 billion in terms of the share of GDP - and that has taken up about one third of the cuts. For those on high incomes, numbers have fallen dramatically and their tax rate has increased, but the amount of income tax coming from that group is substantially down as a result. That has left more of the burden to be carried by people on incomes below €100,000.

A consequence of the changes has been that without tax and welfare payments, there would have been a big increase in equality but because of the increase in welfare expenditure and taxes, there has been a small fall in inequality. I have not heard today's figures but I would not expect there is much action in that respect. That has not been enough to prevent a rise in those at risk of poverty, which Professor Dorothy Watson and my colleagues have talked about. Unemployment has had a major impact, which public policy and welfare has only partially offset. When a great number of people lose their jobs and move down to the bottom of the income distribution, even with a big increase in resources for welfare it has not been enough to move them up, as my colleagues have stated.

While individual policy changes announced in successive budgets, as Professor Tim Callan will talk about, taken together have not been particularly progressive, the overall impact of Government policy on expenditure and taxation of successive Governments has had a progressive impact, reducing inequality and, to some extent, insulating those who lost very heavily in the crisis from the worst effects.

Chairman

I thank Professor FitzGerald. I call Professor Tim Callan.

Professor Tim Callan

I will be brief. I will skip the first two pages of my presentation and start on page 3. In terms of the broad picture of what is happening in income distribution, another perspective on this is to examine what has happened to average real incomes, corrected for prices, over the period 2008 to 2012. The figures in the presentation show that the lowest income group falls by over 25% while the average fall is 14%. There is also an above average fall for the second and the top income groups. We have done a rapid update of those numbers since 11 o'clock and they have changed slightly because the share of the bottom income group has risen slightly but it is still a fall of 20% for the bottom income group compared with that 14%. That is a useful perspective.

Chairman

Was the fall of 14% for the bottom income groups the average?

Professor Tim Callan

The average loss for all households is 14%.

Chairman

What is the percentage for the top income group?

Professor Tim Callan

It is 20% for the bottom income group and around 14% and 15% for the top income group. That points to something going on in the income distribution which a single number such as the Gini coefficient, which is the most commonly used, cannot capture.

The fall at the bottom is disequalising, while an above average fall at the top is an equalising factor. They are washing out in the two and thus one gets a full picture from the income deciles.

I compliment Professor Dorothy Watson and Professor John FitzGerald on what they have been saying. Another point concerns isolating what is going on when comparing income distribution in two years. Policy effects are coming through on two routes, one of which is the structure of policy such that one can set up a tax system and a welfare system with certain characteristics. The other is the structure of market income. Consequently, with a given policy structure - if it is a progressive system as most modern European systems are - as one has more unemployment or more people with very high incomes, they do more work on account of this. Consequently, when one is comparing figures for two years or two countries, one is simply not comparing systems but an effect that has to do with pre-existing income distribution. In order to isolate the effect of changes in policy structure, we use a tax benefit model. SWITCH is the ESRI's model which is very much along the lines of other international models. When we do this and look at the full picture in the period from 2009 to 2015, we get the graph shown as figure 2 in the submission, where the greatest reduction in income imposed by changes in policy structure is at the top decile and next at the bottom decile. It is a complex picture in between, but for many groups, the loss in disposable income is close to 10%. This is quite different from what people sometimes perceive as being the squeezed middle as it is the top and bottom groups that are being squeezed more. We have not yet had the chance to update the figures since 11 a.m. and will do so as soon as we can, but I would not expect them to shift to a major degree in respect of the policy impact. This is to explain why what may at first appear to be different answers from different parts of the ESRI and so on are actually answers to different questions.

Deputy Joan Collins

I am bamboozled. Economics is not my best point. It never was and it becomes even more complicated when one hears Professor Callan outline the different outcomes from the different questions being asked. Does the ESRI's analysis take into account public services in different countries? Other countries provide public services that Ireland does not, which has an impact on those at the lower end who are obliged to pay for these services. Similarly, does it take into account increases in the cost of living, the price of fuel and so on and how they have an impact on it? Does it take in sections of society such as the under-25s? For example, the other day I met a young lad who was in receipt of social welfare benefits and was under 25 years. He is in receipt of the lowest rate of jobseeker's allowance and as it is impossible to live on it - in terms of paying rent and trying to get anywhere - his independence is completely gone. It has that impact.

As for migrant groups, a report was published yesterday on the challenges facing migrants in accessing community welfare services. According to the report, they are not receiving these services. Does the ESRI's analysis break down matters in that way? All of the reports one reads point to growing inequality in favour of the highest percentile of the population globally. Moreover, the numbers in the lowest percentage groups, those on low wages or welfare, are also growing in this regard.

Senator Michael D'Arcy

I probably know even less about economics. However, while I am unsure of what they were saying, I was hearing different things from Professor Tim Callan and Professor John FitzGerald, which is a problem for me. Perhaps one or both of them might explain this. From Professor FitzGerald, I heard that people doing less well economically, in one measurement, did not-----

Chairman

Is the Senator's mobile telephone switched on?

Senator Michael D'Arcy

No; I am not to blame.

Chairman

I ask everybody to ensure all mobile phones are switched off.

Senator Michael D'Arcy

From what I heard from Professor John FitzGerald, they did marginally better than those at the top, but I heard the opposite from Professor Tim Callan. That is what I heard, although perhaps it might not be what they were saying.

My second question, on foot of such income redistribution, concerns the point one often hears that taxing the rich will solve all problems, with the rich being defined as persons earning more than €100,000. In listening to Professor FitzGerald, I heard that there were not too many such individuals about now. What effect would this have on the equalisation or redistribution of wealth?

Senator Marie-Louise O'Donnell

I apologise for being late, but there was a vote in the Seanad. I am unsure of the rules and one learns something new every day, but I had thought the sitting would be suspended until after the vote had concluded. However, that obviously-----

Chairman

To explain, that is not the practice.

Senator Marie-Louise O'Donnell

It should be because the Seanad is also of importance. Moreover, the ears of its Members are as good as those of anybody in the Lower House when it comes to economics or anything else for that matter.

Chairman

I note that there was no such proposal. Had there been, the joint committee would have taken a decision on it.

Senator Marie-Louise O'Donnell

The meeting should not have continued without the Senators being present.

Chairman

A Senator was present.

Senator Marie-Louise O'Donnell

It was an unnecessary vote called by Fianna Fáil that its Members were going to lose on an amendment to the Order of Business.

Chairman

Point taken.

Senator Marie-Louise O'Donnell

I read Professor John FitzGerald's paper and was uplifted by it because I thought he had extraordinary things to say. The Minister was actually on her way into the Seanad and I asked her whether she had read Professor FitzGerald's paper on the distribution of income, social welfare payments and the public finances because he had some interesting things to say about the protection of those who were less well off and about the protection of social protection measures in the Government's policies. I am not advocating for the Government, as I am here as an Independent, but I absolutely agree with Senator Michael D'Arcy in that I am very confused. Professor FitzGerald is saying good things to the effect that there was a massive effort to raise taxes and protect social welfare payments, as well as a massive effort to protect those on low incomes, but because Professor Tim Callan is stating the income of those on low incomes fell by 20%, I am a little confused. Perhaps, as Professor Callan suggested, it has to do with answering different questions.

In addition, I note that persons earning €100,000 or more paid 46% of all income tax in 2007. How many of us are now earning €100,000? Are there are statistics available in this regard? How many of the earning population are earning €100,000 or more? I note that the numbers earning €275,000 or more fell by 28%. Who is now earning that amount? I am a tiny bit confused and while the delegates probably think these are baby questions, I ask them to balance the figures. This is because, in one sense, the point is being made that the policies introduced by the Government to protect social welfare payments and those on low incomes worked or are working and that the money went towards those who were not working and were in receipt of social welfare payments. On the other hand, I would have thought there was such a group as the squeezed middle, those earning between €40,000 and €70,000. While I could be very wrong, perhaps the delegates might outline the point a little better. However, it was the most informed paper I had read in a while, for which I thank Professor FitzGerald. I ask the delegates to bear with me on some of the questions asked.

Senator Marie Moloney

I also apologise for not being present for the entire briefing because, again, I was in the Seanad for a vote.

I thank the delegates and while I am not into all of the ESRI's figures and so on, I do know about the social welfare system and what people on the ground are getting. That is my strong point, not figures.

While Dr. Donal de Buitléir stated we had the most progressive tax and transfer system in the OECD, both absolutely and proportionately, I note that whenever somebody appears on television, he or she claims we have the most regressive tax system.

I cannot understand why people differ in those views. I ask Professor Callan to tell us why everyone differs in this assessment. The witness has outlined reasons some households are, so to speak, workless. I refer to the Minister's proposal on the back to work dividend. Will this have a positive effect for getting people back to work? Much of the time, the people I meet say they are better off not working because they can claim all these benefits. It is terrible to think that a person could be better off being unemployed rather than working. It is important that people are working and we should make every effort in our power to ensure that people are in the workforce. It is preferable for their own good socially, even if it is not economically preferable. It is important for people to be out working and interacting with others.

I have a concern about the future of the State pension. People are living longer, thankfully, and they are in better health. If we do not take action, will it be possible to provide State pensions in the future? It is vital that all those currently working know that at the end of their working days a State pension will be available. I ask for the views of the delegation on this point.

Deputy Ciarán Cannon

I thank the delegates for their very interesting and enlightening contributions. Where is the exemplar? Who is doing this well and how do we compare? In the opinion of the delegates, is there, as of yet, an untapped source of either income or wealth or a combination of both, of a magnitude that can genuinely make an impact and will achieve further equality in Irish society in the future? Is this opportunity available for us and, if so, is it of a magnitude that can make a real and tangible impact? If this is the case, why has it not been done up to now?

Professor Tim Callan

I will try to deal with as many of those points as I can. One question was whether public services are included. The answer is that, for the most part, they are not, and this is true internationally because it is a lot easier to analyse things that are measured and arrive in cash. Some parts of the work are being extended into non-cash areas, such as the ongoing new research on reform of the health system and medical cards, for example. A seminar next week will hear a person from the UK Treasury speaking about their approach to these matters. We are not unusual internationally in looking purely at the cash-led aspect, because that is the focus of the EU Survey on Income and Living Conditions, which focuses on cash income and benefits.

The figure of minus 20% in my submission is simply derived from two tables in the CSO's press release, which has been updated today. There is nothing very fancy about it, as it is what has been observed as happening in low-income groups. It is total income, so it is not the case that it is due to a reduction in transfers or welfare payments, because it is mostly due to loss of employment income and so on. We are digging further into that and we will produce more research later this year in order to explain why this is happening. It is not particularly to do with the transfer side of things.

The back to work dividend is a work in progress, along with medical cards and the housing assistance payment. Reforms in all those areas will certainly contribute to making work pay. As to exactly how much they will contribute, that is to be determined, and exactly how much people will respond remains to be known.

Deputy Cannon asked about an exemplar. I would not pin my colours to any single mast. However, in preparing this submission I noted that we tend to think of the Scandinavian countries as having arrived at a very equal distribution of income, because they have quite compressed wage distributions so the pre-transfer income is already quite equal. Looking at figures from the EU-SILC, it looks very much as though Denmark had quite high pre-transfer income and also the same configuration as ourselves. I flag this information because it is worth examining further.

On the question of whether there is a squeezed middle, there are two senses to that question, one being whether people in the middle are being squeezed. Definitely they are. Everybody is being squeezed when we see average incomes going down by 10% to 14%, and nobody is escaping. There is often an implication, in talking about a squeezed middle, that the middle is being squeezed by more than some other people, who can only be at the top or bottom of the distribution. That does not seem to be the case either in these figures or in the updated figures we arrived at after 11 a.m. today.

Professor John FitzGerald

Professor Callan has answered Deputy Collins's questions about public services. Where public services are paid, they are picked up in the expenditure surveys. Information on migrants is included in all the data, but asylum seekers are not, so they should be represented. Senator D'Arcy and Senator O'Donnell asked how to reconcile what seem to be two different stories. It depends on how one defines policy - Professor Callan may wish to respond on this. The way Professor Callan defines policy changes is if social welfare payments are increased in real terms or cut in real terms or if tax rates are moved up or down. That is a fairly standard definition of policy changes. What I am referring to is allocation of expenditure. There was no basic change in policy initially in terms of welfare payments. There were major changes for the under-25s, which will be mentioned by Professor Callan. However, it is the allocation of a further very significant amount of money. Economists refer to automatic stabilisers. When a lot more people are unemployed, if the welfare rates and entitlements are not changed, there will be a very significant increase in expenditure. As Professor Callan said, it depends on the question asked. When one sees these catastrophic and massive changes in allocation and expenditure and €30 billion in cuts, then I think one must look at it both ways. There was a decision to protect. I know that people on welfare do not think they are being protected relative to what might otherwise have been. There would have been suggestions from the troika - although not very strong - that maybe it would be easier to cut welfare payments by more so that taxes would not need to be raised by as much. The decision was taken by successive Governments not to do that. I do not know whether that makes it any clearer; it depends on how one defines what is policy.

Senator O'Donnell asked me how many people earn above and below €100,000. I have that information in my laptop, but I will revert to the Senator because it would take more time than it is worth. It is worth a lot to answer you, Senator.

Senator Marie-Louise O'Donnell

Does Professor FitzGerald think it is a question worth answering?

Professor John FitzGerald

It is. I refer to work by Brian Nolan and Professor Callan which shows that the top of the income distribution, above €100,000, is relatively small. The Revenue Commissioners' data are better.

Senator Marie-Louise O'Donnell

Does that not question the overall percentage? I refer to the example given by Professor FitzGerald.

Senator Marie Moloney

If four people were earning over €275,000 and two of them lost their jobs, that would be a decrease of 50%. It sounds awful but it is only two people.

Professor John FitzGerald

Basically, people on really high incomes in Ireland probably earn it from property, but property was wiped out, as can be seen in the courts and in bankruptcy cases. They were paying more tax than the average, and the average tax rate for people earning above €100,000 has actually gone up, as one would expect.

Senator Moloney asked a question which I will ask Dr. Donal de Buitléir to answer. On the question about future State pensions, that is a serious issue.

It is not a problem for me; I will be dead before the crisis hits. However, the question of how we finance pensions concerns younger people. I have been very critical of policy in the past decade, but I believe one policy that was wise was building up a pension fund. In the longer term, the Government needs to run a continuing surplus, on average, over the cycle to allow a fund to build up so that my grandchildren's pensions will be paid; otherwise, they will have a big problem. It is not an issue for today or tomorrow, but the committee is correct to focus on it. It is a very important issue.

A question was asked about exemplars. If one wants to examine redistribution of income by a state, Ireland is the exemplar, as Dr. de Buitléir highlighted. There is a reason we tend not to think about that. A really important research question, to which I do not have an answer, is why market incomes in Ireland are the most unequal in the OECD area. That is the puzzle. The welfare and taxation systems have to do considerable running to make a really big difference. I do not know whether the members have an answer to the question. It is an important question that deserves a response but I am afraid I cannot answer it.

Dr. Donal de Buitléir

On Senator O'Donnell's question, the Revenue Commissioners have very good data on those who have high incomes. We can get them for the Senator. They indicate whether one is married, single, self-employed or a proprietary director. There are all sorts of categories. My guess is that the professions comprise a significant part.

Senator Marie Moloney

Are the data accessible to us?

Dr. Donal de Buitléir

They are publicly available on the website. They are published every year and one can see trends. Perhaps the members have more access because they can ask a parliamentary question.

Senator Marie Moloney

Senators cannot.

Dr. Donal de Buitléir

The fact is that we have the most progressive tax and transfer system. Whether that is good or bad is a matter for politics. People who state in the media that it is not the most progressive are just talking rubbish, but sometimes that happens. Nobody in this room would be guilty of that, of course.

I was asked about the back to work dividend. I will come back to that. The issue I am really concerned about is the high number of workless households. The national expert on that subject, Professor Dorothy Watson, is in the room. She has done really ground-breaking research on this. The issue is really important economically and socially. I speculate that this has a significant part to play in explaining why our market income distribution is so unequal. If 23% of people, or approximately one quarter of the population, have little or no market income, it seems there will be a very unequal distribution.

On the question of why the Irish economy is unusual by comparison with others, we have a very large multinational sector. We generally have a dual economy in Ireland, comprising a multinational sector and a domestic economy. Incomes in the multinational sector, I suspect, are significantly higher than in the rest of the economy. I do not have any data and it may be hard to quantify.

I am really concerned about pension sustainability, not only in respect of the State pension but also in respect of the occupational pension. Life expectancy is increasing. This is alarming to a pension fund manager, although the rest of us believe it is very good.

Senator Marie Moloney

We are all heading in that direction. We believe it is great.

Dr. Donal de Buitléir

The older I get, the better I think it is.

I do not believe we have done enough to address the issue. One does not have to do anything about it today because nothing much changes, but if it is not addressed it will be a problem. It is one of the most strategically important questions.

On Deputy Cannon's question on whose system works well, I agree with Professor FitzGerald that ours does. We have put a lot of emphasis on the tax and transfer system. The solution to this problem may require other measures, such as tackling the number of households that do not have work. That is a complicated issue. Is it a question of providing better child care, training and education? There is a real problem of social exclusion and social disadvantage among the group in question, and this comprises a real problem that we need to do something about.

Senator D'Arcy asked whether taxing the rich would solve the problem and Deputy Cannon alluded to an untapped source of wealth. According to my judgment, there is no real pot of gold. I spent two terms in the Revenue Commissioners and noted that we were certainly very good at finding where money was. Therefore, I do not believe there is any simple answer to the question. I wish there were.

Mr. Cormac Staunton

I will address a couple of points that were raised. On the subject of the most progressive tax system in the world, I want to make two points. Obviously, the number is available; it is published by the OECD. There are couple of points that are very important to understand about that number. It is measured by calculating the gap between the tax rate on two thirds of the average income and the tax rate on what is either one and two thirds or twice the average income - I cannot recall which is correct. Ireland has the biggest jump in the effective tax rate actually paid on the incomes. The reason we have the biggest jump is not because we have the highest taxes on people with twice the average wage but because we have lower taxes for people who have below-average wages. Our tax rates applicable to those on twice the average wage demonstrate that we are not in any way different from other countries. However, it is in respect of taxes at lower rates that we are different. This is where we get the big jump.

Another point to remember is that the measure does not account for taxes on incomes beyond one and two thirds or twice the average income. In other countries, the tax keeps going up with one's wage. One's taxes increase progressively as a percentage of one's income, including when one is on three or four times the average wage. In Ireland, however, the progressivity of our tax system flatlines because we have just two rates. Now, with the changes to the USC, one could argue that we have more rates but, up until the recent budget, there was really no difference in one's tax rate once one reached the threshold of €32,800. The new USC level results in a slight increase in progressivity, but not much. The curve of progressivity starts off low, jumps and then flatlines again.

I have outlined two reasons for the number. It is important to understand that.

Senator Marie-Louise O'Donnell

It is not progressive, in that case.

Mr. Cormac Staunton

It is at a certain point, which just happens to be the point that the OECD measures. That is why we get that number. We need to look at it in the round.

As to why Ireland has the most unequal distribution-----

Senator Marie-Louise O'Donnell

Mr. Staunton is contradicting the idea-----

Chairman

We will come back to that.

Mr. Cormac Staunton

Second, the question of why we have the most unequal distribution is really interesting. We need to examine further why Ireland's distribution is the most unequal before taxes and transfers are taken into account. There are some points to make on this, however, and they are included in the handouts we submitted. We have a quite low employment level overall. I am not referring to the unemployment level. Some 65% of working age adults are in employment. It is 70% for men and only 60% for women. Therefore, only 60% of women of working age are actually in employment. By contrast, countries such as the United Kingdom, the Netherlands and Denmark have a figure of 76%. In Sweden, 80% of working age adults are actually in employment. One needs to ask why the Irish rate is low. A reason could be the cost of child care, for example. Perhaps for certain families it is not economically viable to have a second person working and paying child care costs. This is just one example of many that could be examined.

On the other issues, I was asked whether we should consider public services and factors such as the cost of living. The figures account for cash, and Ireland is very heavily weighted towards cash payments. We are not accounting in these figures for public services and the cost of living. As I stated in my presentation, TASC is to produce a report that will attempt to examine inequality in the round. It takes into account how we deliver public services. It will examine wealth and the cost of living in Ireland and how such factors affect overall economic inequality, not just income inequality or the distribution of income, which we were considering today.

On the question of inequality falling in the immediate aftermath of the crisis, I tried to address in my presentation the point that the inequality rate falls because something happens either at the bottom or the top.

The point I tried to address in my presentation is that inequality decreases because something happens either at the bottom or at the top. In Ireland, because of the crisis, incomes at the top were squeezed and pushed down. The income floor provided by the social protection system and the fact that it was not changed radically meant that nothing happened at the bottom. Therefore, we had a contraction. Now, the income floors have not changed, more people are working and incomes are going up, but the underlying inequality is still in place and, therefore, we are probably going to see a stretching of the distribution of income again.

The payments themselves do not address the underlying causes of inequality. In fact, the crash caused the major contraction. It was not because anything underlying had changed or because Ireland necessarily became a more equal country structurally. It was the crash or crisis that really caused it.

Professor Dorothy Watson

I will be quick, because many of the points have been made already. I was keen to highlight a point about public services at the end of my brief talk because it is an important issue. The proportion of services provided publicly in Ireland is lower than elsewhere. This should be taken into account when we consider the significance of cash benefits. Some research we have done shows that the quality of life of people who are economically vulnerable is more strongly affected in Ireland by poor-quality public services than the quality of life of the general population. This is an important question.

I was asked why we are coming up with different answers and apparently contradictory pointers. I suppose the issue is that we are examining different parts of the distribution. My comments focused particularly on social transfers and on poverty at the lower end of the distribution of social transfers. Professor Callan took account of taxation and examined the whole range of income distribution. Others have considered market income as well. All of these work in slightly different directions. Another issue is whether we compare Ireland with other countries now or the changes in Ireland over time. That can give a slightly different picture as well.

I am keen to reiterate that the bottom line in terms of social transfers is that they did a great deal of heavy lifting in the recession. This was because there was a great deal of heavy lifting to be done, because market incomes collapsed. There was a high rate of joblessness and therefore social transfers became decidedly important in keeping people above a very basic income level. That does not mean their standard of living was adequate. We still saw an increase in basic deprivation, and some people lacked basic goods and services, but they were seriously important none the less. Policy might have gone in a different direction. It might have slashed social transfers and the outcome would have been very different.

Reference was made to jobless households. I understand the committee had a major discussion about that last week.

Chairman

That was with the National Economic and Social Council.

Professor Dorothy Watson

It is a major issue and undoubtedly it is behind the figures for inequality and market incomes. We have many zeros in Ireland relative to other European countries. Why are we so high? More of our working age adults are not working, as Mr. Staunton said. In particular, we have a high joblessness rate among lone-parent households, a particularly high-risk group in Ireland. Affordability of child care is undoubtedly an issue in this regard. We also have a high rate of joblessness among those with a disability in Ireland. If more policy effort were focused on that issue there might be some benefits as well.

Let us consider jobless households. Approximately 50% contain either children or adults with a disability. One of the reasons we differ from other European countries is that adults in jobless households are more likely to have children in Ireland compared other European countries. Moreover, they are more likely to have larger numbers of children compared to other European countries. There is a barrier to work associated with children. Child care would be an obvious place to look for an explanation.

Chairman

I know that Mr. Donal de Buitléir wanted to come in on the point about progressivity, but perhaps we might wait until we get the question. Do you wish to have further clarification, Deputy Collins?

Deputy Joan Collins

When the crash happened, those who benefitted were those who sold properly when prices were at their height. Others lost out. Therefore, there was a cash transfer of wealth into certain hands in that period. The money did not go away. It was still there. That is what I cannot understand. That money is still in the system.

Another question I am keen to ask relates to property tax. Do the witnesses believe that it extends - I am trying to remember the term used at the time - because our tax system was not bringing in the cash-----

Chairman

Does it make the system more sustainable? Is that it?

Deputy Joan Collins

Yes. Does it extend it out? Do the deputations believe it is an equal way of taking in tax?

Perhaps I picked up another point incorrectly. Is VAT considered from the point of view of tax in respect of those on higher incomes? I read some commentary from Michael Taft. He suggested that when we take all the other taxes into account, the wealthy benefit more than the poor. I accept the fact that there is no crock of gold anywhere. However, people want to see a progressive taxation system under which those who have more wealth pay more. Last year, the assets of the wealthiest in society - the top 10% - grew by €6.5 billion, which brought the figure to over €60 billion worth of assets. This includes boats and portraits and so on. We are awaiting the figures for this year. The Irish Independent usually does it every year. Anyway, this vast wealth is not being taxed or tackled in any shape or form. What if there was a 1% tax on all of that? What would that bring to an economy that could utilise that money in a way that would benefit society? These are the questions we should be asking.

Senator Marie Moloney

I would like to hear the opinions of the deputations on corporation tax. Is it a good thing or a bad thing? Do the witnesses believe we should hold it or change it? I believe people overlook some of the facts. Some say the multinationals in this country are not paying enough tax. If they left the country we would have a cohort who would be unemployed and we would not have tax coming in from them. Furthermore, we would have to pay social welfare to those unemployed. People seem to overlook that every time they speak about the matter. No one seems to realise the dangers of what we are doing.

People can debate it if they wish, but I believe a major wedge has been driven into Irish society. There is great anti-social behaviour in Ireland in the sense of public versus private sectors and the self-employed versus the unemployed. Someone might say that it is all right for those in the public sector because they have a job and are not going to lose it. Others in the private sector maintain they have to pay everything but could lose their job in the morning. Some people who are employed maintain that those who are unemployed get everything and they get nothing. There has been an awful divide in Ireland over the recession. How can we bring that back to where we were? During the good times, people did not seem to care what other people were getting or what they were doing, but they do now. They look at everything; they look at what people have and what they are getting.

What is the view of the witnesses on how the self-employed fare in Ireland? Do they believe they are being excessively taxed? They do not have all the benefits that a PAYE worker has. I know they get a good deal for the 4% they pay in PRSI. We have discussed the matter at length. If we were to bring them into the PAYE system or the full benefit system, their PRSI contributions would go up to 15%. This would be a major blow to people, particularly the smaller self-employed people who are struggling from day to day to make ends meet. I am keen to hear the views of the witnesses on those points.

Senator Marie-Louise O'Donnell

In his very good paper Professor FitzGerald made a point which is important for my colleague, Deputy Collins, to bear in mind. Referring to the period after the property bubble burst, he stated: "The need for increased taxes and for cuts elsewhere in the economy was greatly increased by the decision by successive governments to protect those on low incomes who were dependent on the welfare system." Therefore, we had tax cuts to protect people on low incomes. He then went on to say that the bulk of the burden of increases in taxation had to be carried by those on middle incomes.

Will he tell me what he means by "middle incomes"? How does Professor FitzGerald define it because if that is the case - to protect the less well-off; I know all about the ramifications - we are back at square one with regard to what Mr. Staunton said about progressive taxation. While it is actually progressive, there is a massive plateau. It kicks in around €30,000, bar the universal social charge, USC, which is the same at €17,000 and €70,000. I brought up this issue with the Minister because there was a cut below €12,500, as it does not appear to be progressive in the sense that those earning €70,000 are nearly paying less than those earning €42,000. Is the Chairman with me?

Chairman

No.

Senator Marie-Louise O'Donnell

As for my confusion, it is like being in high babies because I am so stupid. However, I ask Professor FitzGerald to answer the question. I do not believe the taxation system is progressive and Professor FitzGerald said it was not. He said it was linguistically but that realistically and mathematically, it was called a plateau. Is Mr. Staunton with me on this point?

Chairman

I intended to ask a few questions on that issue. Perhaps Dr. Donal de Buitléir might respond to the question of whether it is progressive, how it is and so on with regard to the points made by Mr. Cormac Staunton. I was wondering about the budget. I am not an economist, but to try to figure it out, I looked closely at the tables provided in which the effective rates of tax were considered. I could see the system was progressive if one took someone on €15,000 versus someone on €120,000. However, I thought those on €25,000 - in other words, the lower middle income group - were losing out. I invite the delegates to comment in this regard.

I saw a paper - I believe it was on the PublicPolicy.ie website - which mentioned that the gap between lower and middle income earners might be increasing, as opposed to between lower and top income earners. Am I incorrect? I read somewhere that there might be an issue in this regard. When one examines the last budget, proportionately those in the middle did the best. Those on incomes between €40,000 and €70,000 approximately were the ones who came out the best in how their tax position had improved if one went through the tables and appendices.

I was wondering about the SWITCH model because there was a debate over the weekend in some media outlets on whether the threshold was too low in the case of inheritance tax for children, a point on which I personally disagree. However, I recently tabled a parliamentary question and it appears as though the Exchequer has managed to maintain the level of capital taxes and that appears to be because the percentages and rates were increased, while the thresholds for inheritance tax were lowered. Does the SWITCH model now take this into account? The pension levy and pay cuts for public sector workers in the course of the recession were progressive in that the more one was paid, the bigger the percentage cut was, while caps were placed on public sector salaries. Is the fact that there is a high proportion of public sector workers in the economy factored into the issue in terms of outcomes?

My other question concerns the black economy. While I do not know how it compares with that in other countries, is it an issue for those on lower incomes? I refer, in particular, to the self-employed. Are there issues in this regard? Can they be investigated in any way or is it just something about which we know nothing?

I invite the delegates, starting with Dr. de Buitléir, to come back on as many of these questions as possible, including the question about progressivity.

Dr. Donal de Buitléir

The property tax is a highly progressive measure and I strongly support its introduction. If one looks at the numbers, property taxes in Ireland are quite low and were I a betting man, they may not always be as low. The most regressive part of the tax system is the excise duty on tobacco, in particular, followed by the excise duty on alcohol. This raises really interesting questions. If one was driven solely by income distribution considerations, one would cut the excise duty on tobacco to zero. I do not think that would be a good idea, but it is something to think about.

As to whether the idea behind the corporation tax rate is a good one, we have been doing it since approximately 1956. When we started, the tax rate for Irish exporters was zero, while the average corporation tax rate in the European Union was 50% and the differential was 50%. We charge 12.5%, while the average rate is in the middle 20s. As a consequence, the differential has moved from 50% to 12.5%. Moreover, my assessment is that the next movement in rates in Europe will be downwards. As Sir Humphrey might say, it would be courageous for a Minister to decide to tamper with it because one simply does not know what the tipping point will be. One can have opinions on it, but-----

Senator Marie Moloney

It would be a game of Russian roulette.

Dr. Donal de Buitléir

I consider the current attitude to be the correct one. It is contestable, but I would leave it alone.

Self-employed persons on low incomes are badly treated under the tax system. I did some work on this issue recently. A self-employed person on €15,000 pays eight times as much in tax as an employee on the same income.

Senator Marie-Louise O'Donnell

Is Dr. de Buitléir joining Deputy Lucinda Creighton?

Dr. Donal de Buitléir

No, I am not. I put out the stuff and she can quote me if she likes.

Senator Marie-Louise O'Donnell

Was that not one of her arguments?

Dr. Donal de Buitléir

That is what one gets if one does the numbers.

Chairman

Moreover, they cannot receive family income supplement.

Senator Marie-Louise O'Donnell

They pay 8% more.

Dr. Donal de Buitléir

No; they pay eight times more, that is, 800%. I acknowledge that they are pretty low numbers and part of the reason is the PAYE credit of €1,650 which was introduced in the budget for 1980, primarily because at the time self-employed persons paid tax based on their income in the previous year, while employees paid on a current-year income basis. Inflation was running at 18%; therefore, as a result, one's income in the previous year was a good deal lower. That anomaly was dealt with and self-employed persons now pay tax based on their income in the current year, but the compensation introduced through the PAYE credit was not amended. One thing of which one can be sure in respect of taxation is that persons on the same income should pay the same in tax, but that does not happen right across the system. Incidentally, were one to impose religiously the principle that those on the same income pay the same in tax, it would impose radical changes in income distribution. However, self-employed persons on low incomes, in particular, are treated extremely badly.

Senator Marie Moloney

On that point, a self-employed person who loses his or her income and approaches the social welfare system to sign on will be allowed to receive jobseeker's allowance. However, one will not receive a credit towards contributory pension. There is an anomaly in this regard that hits the self-employed and, in particular, self-employed persons on low incomes.

Dr. Donal de Buitléir

I did not know that; I learn something every day.

Chairman

In addition, such persons cannot receive family income supplement.

Dr. Donal de Buitléir

On the issue of progressivity, it is important to be clear on what I mean by this. As one moves up the income distribution ladder, one pays a higher percentage of one's income in tax. That is how I define it. If one considers it, the basis for my statement that Ireland has the most progressive tax and transfer system is the OECD numbers which show the pre-tax and transfer Gini coefficient and the post-tax position; it is not just two particular points of income distribution, although some measure it in that way. Incidentally, if one does measures it in that way, one gets the same answer, but looking at it globally, unless the OECD is wrong, it is an incontrovertible fact that Ireland has the most progressive tax and transfer system in the OECD. It is a question for politicians as to whether that is good or bad, but to my mind, it is a fact. If one looks at the numbers, for single people on half of average earnings, we have the lowest tax burden in the OECD. For a single person on average earnings, we are about in the middle of the pack and as one moves up to two and a half times average income, I believe we are ninth. As one moves up the income distribution scale, Ireland climbs towards the top in the OECD. We will probably never get to the position that obtains in Denmark, but at the bottom, the differential between Ireland and Denmark is in the mid-teens.

Those on low incomes in countries with progressive systems pay relatively high taxes, although they receive a lot of services in return. I assure Senator Marie-Louise O'Donnell that the tax system in Ireland, no matter how it is measured, is highly progressive. At 52%, while not the highest in the OECD, our marginal tax rate is not too far from it and is not the lowest. It hits at a low level of income in Ireland, at about average earnings for a single person, whereas in Germany it hits at six times average earnings. Belgium is nearest to Ireland. If members are interested in pursuing these questions, I am happy to spend hours talking about them and our office is just around the corner.

Professor Dorothy Watson

I will defer to Professor Tim Callan on this point because many of the questions concern taxation, at which he has looked more closely than I have.

Professor Tim Callan

I will try to hit some spots. Senator Marie Moloney asked questions about the division between public and private sector employees and the unemployed. People also wonder whether they are particularly hard done by compared to others. The only remedy is to improve the quality and quantity of information available on these topics, as we are trying to do in making the research available and known.

The Chairman asked about the SWITCH model. It takes account of the complicated structure of public sector pay and changes over a period. We could not take into account straightaway the increase in the capital gains tax rate, but, with information supplied by the Revenue Commissioners, we have patched it in for the budget for the next year. It is a difficult area and the CSO has announced today that it expects to publish the findings of the new survey of household wealth soon. A lot of work must be done on this issue, which will open up these topics in ways that can feed into the debate.

I have some concerns about whether the property tax can be described as progressive. That does not mean that it is a bad thing, but looking at the burden as a proportion of income, it comes out as being higher on those on low incomes. The way the United Kingdom has chosen to deal with the issue is to have a special council tax benefit, a name for its property tax. I am not saying it is ideal, but it is an issue for debate. There is a deferral option, but it is not the same as the waiver option provided in the United Kingdom. It is tenable to say the system is progressive in many other ways, but it is a political decision.

Professor John FitzGerald

To respond to the question asked by Deputy Joan Collins about where the money had gone, at the top end I suspect there were people who were making money from property. A company was seeing capital gains as office buildings increased in value and it was taken as income, but that has disappeared and a lot of money has disappeared.

On the question of raising more from people who are richer, an idea I support, the answer is not to raise the marginal tax rate but to find other ways of doing it. There are many allowances at the top end and getting rid of them would have a major impact. The nice thing about the USC is that there are no exemptions at the top end. Switching USC for income tax at the top end was a good idea. It is, therefore, a question of finding different ways of doing it. Doing it at the marginal tax rate discourages people and there is a lot of evidence to support this. People tend to think of the marginal tax rate as applying to really rich people, but it could apply to a couple one of whom is earning €80,000, while the other is earning €30,000. Raising the marginal tax rate, because of the cost of child care, means that it is not worth both of them working and it disproportionately hits women. It means that we could well see a further reduction in the female participation in the labour force. If it is applied to property tax, people may have to go out to work to pay the property tax. As an economist, having a property tax is a really good idea because it does not distort these incentives. A couple pay the tax and can work out how to do so. There is major evidence that property taxes do much less damage than other taxes in terms of people's work behaviour. That is why economists tend to favour them. While there are distortions, a 50% rate is okay, but going much above it could lead to a problem.

In 1999 and 2001 I proposed increasing the rate of corporation tax a decade hence to 17.5% and there was uproar. I would not do it today. However, the funny business around it means that we need to tighten the rules because it is doing huge reputational damage to us around the world. It could have upset the apple cart in terms of the bailout as people wanted to be really nasty to us because of it. Some 12 or 13 companies are referred to as redomiciled plcs. Although located in Ireland, they are doing nothing. People fly over once a year for an AGM in a hotel and we are paying between €50 million and €75 million in tax on their income which we never see to the European Union in a budgetary contribution. If we could chase them out, we would be better off by between €50 million and €75 million. I have talked to multinationals that are concerned about the funny business because they create real jobs and are really important to us. They are afraid that Ireland might be screwed on this issue and that they might be screwed as a result. They think they can justify the 12.5% rate on what they do. There is a reputational issue.

Dr. Donal de Buitléir dealt with the issue of the self-employed who, with regard to PRSI, obtain very good value, as it more than pays for their pensions. I totally agree on the other points made and with what he said about tobacco.

Senator Marie-Louise O'Donnell picked me up on an issue raised by the Chairman. A middle income figure is not less than €100,000. I changed the reference in one place but not the other. The Senator picked me up on something that I deeply regret when I referred to someone earning less than €100,000 as a middle income earner.

Senator Marie-Louise O'Donnell

Who can be described as a middle income earner? What are the margins?

Professor John FitzGerald

Average earnings are between €35,000 and €40,000. The figure does not go much above €40,000 if one takes all wage income and divides it by the number of people employed. There are complications, but I tend to work on the basis of €35,000 to €40,000.

On the question of whether the tax system is progressive, I seem to remember research from the dim and distant past when I was a middle-aged economist conducted by colleagues in the ESRI, Professor Brian Nolan and others, which suggested that what made the system progressive was the welfare system. We have a targeted, not a universalist, system and try to get better value for money from welfare payments. Dr. Donal de Buitléir talked about the two Gini coefficients, which provide a very good measure. One could undertake a research project to work it out, but it is my suspicion that it is the welfare system that makes it progressive.

The Chairman referred to inheritance tax. I do not see why we should leave money to children and think my children will buy into this.

Senator Marie-Louise O'Donnell

If Professor Honohan introduces the 20% down payment on a house, we will not need to.

Professor John FitzGerald

I do not want to go there. In the black market my suspicion would be that there is, as in most economies, but I do not know they are making a huge amount of money. When I think about the people I come across who might not be declaring for tax and what I am paying them and multiplied by the number of hours they would want very hard to make an awful lot of money outside the tax net. My suspicion is that it is the allowances which people on high incomes have - they are doing it legitimately - that need to be looked at.

Mr. Cormac Staunton

Firstly, on the progressivity and severity of the tax system, as Deputy Áine Collins said we have also to look at the effects of VAT, excise and so on. The tax system is not only income tax, it is just one small part of it. The overall progressivity needs to be measured by examining the tax system as a whole. On the issue of whether it is the tax or welfare that reduces income equality, the OCED give a figure before taxes and transfers of 56.8%, the higher the number the more unequal we are, before transfers after taxes 53.5% and after taxes and after transfers 29.9%. Therefore, it is clear that the social transfers, not the tax on its own, that makes us more equal.

On the question of middle incomes I am not sure if the Senators have a copy of our submission but we use the Revenue data that was quoted here. It is the TASC submission, which includes chart 1 and chart 2. Chart 1 is the raw data which is done by tax case. It can be a single person, a couple with one earner or a couple with two earners. We have translated it into the number of adults in chart 2. We have put the actual earnings, namely, gross earnings before taxes and transfers into groups. We have also added in those not captured in Revenue data. These are the people who are not working or getting an income. We have not given them an income as such but have just put them aside. The chart shows that the vast majority of people, probably 60% or more are under €30,000, and in fact the €40,000 to €100,000 grouping is not 50% of people, it is a much smaller group of people so that the middle is probably somewhere in the €25,000 to €30,000 range. As it is income and because it is skewed one needs a lot of people on €20,000 to bring the average down to compare to one person on €100,000. The average income from work is €35,000 but the average income of all adults is probably much lower than that.

Chairman

Especially when one-----

Mr. Cormac Staunton

We are just looking at adults. Where there is a dual earner couple we have split it 50:50. At TASC we do not think that €40,000 to €70,000 is really the middle, we would see that as the upper middle; the middle is probably €20,000 to €40,000. When the welfare income groups are added-----

Chairman

CSO figures for household income are split up. Children have to come into the picture. If a person has four children and is on, say, €70,000 with a spouse who is not working, the CSO divide it up to disposable income. Is that not part of the picture?

Mr. Cormac Staunton

It equivalises the income and assigns an income to each member of the household which distorts things in terms of equality because one is not looking at the distribution of incomes given. Different families on the same income will look differently in that distribution. That is the data. One can see from it how many people are over €75,000 and it is a very small number. If is above €75,000 one is in the top 10%. That is not the middle. I guess when welfare incomes are included one is talking about adding between €8,000 and €12,000 per adult in the first two columns in the data. That is in answer to what is the middle.

Chairman

Does Mr. O'Sullivan wish to add anything at this stage?

Mr. Cormac O'Sullivan

No.

Chairman

Does anybody have views on whether the social protection system can be improved in any way to help income distribution to cushion hardship and so on? An issue that has come up in debate is whether the policy of this Government is worse than that of the last Government or the same or better? I would be interested in an answer to that question.

Senator Marie-Louise O'Donnell

I would like to ask Mr. Staunton in what way, if he had a magic wand, he would change the tax system? Is there something that could be done that is not being done or something that he sees that could make it more progressive and fairer? I understand there are a thousand different ramifications of the progressive system as Dr. de Buitléir pointed out. It is a privilege to be here because the issue has been researched and reasoned. Communication is terribly important. Sometimes in the media we do not get the reality of what is going on. We get a bit of it or a doorway into it but we never really get it. It is important that politicians and Senators, I include myself in this, actually get lessons on it in terms of what is going on, not necessarily to prove a political point but that the facts speak for themselves, regardless of the party or who one is representing.

Chairman

There is mobile phone interference.

Senator Marie-Louise O'Donnell

Is there any way the representatives can do anything about the funny business? Colm Keena wrote some very good articles on this in The Irish Times where he followed some European journalists on that business that has started there where there were all these ghost companies in Luxembourg with knobs on hall doors but nothing behind them. Is there any way we can be influenced to actively spend time, like CAB, going after that? As the witnesses have rightly pointed out, €75 million is an awful lot of money to pay to the EU for something that we cannot see or avail of.

Senator Marie Moloney

I would like views on an issue I have raised previously but it seems to go under the radar. If a person works in Ireland for ten years and leaves the country and works for 40 years in another country, at pension age that person will receive a pension from Ireland based on what he or she paid in Ireland plus what he or she paid in another country, because we have bilateral agreements with America, England and other countries. I feel a pension should be based on the contributions the person paid in this country of, say, €95 or whatever per week. We take into account all the contributions the person has paid for 40 years in another country and he or she receives a pro rata pension which is at a much higher rate while not having contributed here for more than 40 years, except for the ten odd years. I am convinced we should be looking at a pension based on what they paid in this country. They will also get a pension in the other country based on what they paid in that country and on other Irish contributions as well. Therefore, they are benefitting on the double from contributions. In recent years many non-nationals who worked in Ireland have returned to their own country because of the crash in the economy. Going forward we will be paying a pension to these people despite the fact that they have contributed only for, say, a minimum number of years here. I would like to hear the views of the representatives on that issue.

Chairman

Does Deputy Áine Collins wish to ask a question?

Deputy Áine Collins

No.

Chairman

That is probably the last of our questions. I will start with Professor Dorothy Watson.

Professor Dorothy Watson

The general question of how the social protection system could be improved is a big question. One feature of the Irish social protection system that has come up in the discussion is a heavy reliance on means tested payments so that if the person starts earning income the social transfer is reduced right ay. That is a good strategy if the emphasis is on getting the best value for money in terms of targeting it towards the people who are least well off, who have no income from other sources.

It begins to create difficulties with the transition from being dependent on welfare to being in employment. The significance and implications of means testing for the transition period needs some attention. It comes from the general concern with household joblessness.

I am not familiar with the pension issue, which sounds very intricate and complicated. I thought Ireland could apply for a transfer of funding from the country in which the person made the 40 years' worth of contributions. Given that I am not sure about that, I am better off not commenting.

Senator Marie Moloney

I will chase it up.

Professor Dorothy Watson

As to comparing the policies of different Governments, I will make no comment.

Professor Tim Callan

When we have something to say about areas in which the system could be improved, we tend to say it. We will have a budget perspectives conference in June and we are working on two papers related to potential improvements for it. One is about the idea of the back to work family dividend, medical cards and housing assistance payment improving the incentive to work. The other is examining options for tax and universal social charge, USC, and will be a forward-looking rather than a backward-looking paper. I hope they will contribute something.

Given that our role is to produce accurate numbers and let others judge, I will adopt a similar strategy to Professor Watson's on comparisons between this Government and the previous one. There is a theme in economics around the idea that one can observe the actions of governments in these distributive areas and infer their preferences between different income groups. It has always struck me that there is a missing link in the literature - namely, that governments at different times are choosing from different possibilities and choice sets, and this comes into play when one is trying to evaluate them.

Professor John FitzGerald

While my colleagues are probably more knowledgeable on improving the welfare system, the area where there is a gain to be made is that of lone parents. This goes back to the issue of jobless households. There is a double dividend to be had from finding a way for lone parents to get married or have a partner and get back to work. The Government would save on welfare and increase its tax take and would also get more output. The work I did suggests that one percentage point of the growth rate in the second half of the 1990s was due to women joining the labour market, and given that we are running out of women who are doing this, this growth had to slow.

I am not an expert on corporation tax. In the past two budgets the Government has made significant changes, and I hope that closes off the issue. Dr. de Buitléir is much more expert on it than I.

There is still a very significant transfer to Ireland from the British Government to pay for pensions. There are EU regulations on such transfers. Given that immigrants are much less likely to draw benefits than natives, they are doing badly from the system. Although they pay taxes, when they lose their jobs, they tend to go home and not draw benefits. This mirrors what has happened in the UK. A series of papers for the UK have shown that the pensions of people there are being significantly supported by the number of immigrants. If all the immigrants in Britain went home, the UK would have a significant problem. Immigrants pay much more tax than they draw in benefits and the conclusion is that immigrants are good for pensions.

Chairman

It is good information.

Dr. Donal de Buitléir

The abolition of the "double Irish" tax arrangement in the budget was a good move, which addressed the most egregious example of the funny stuff. While there is more to do in corporation tax, it was well done.

I am concerned about unemployment traps. EU numbers show that the unemployment trap for somebody on half the average wage is 87%. For three years in the 1990s I was on a committee which examined the issue, and it is time to study it again. It may be related to the jobless household issue, and there is work to do on it. Now is the time to do some work on the sustainability of the State pension. We need to address it before it becomes a crisis.

We have taken €2.8 billion out of tax reliefs since 2008, and this is often not factored into the distribution issue. The USC base for taxpayers in general is lower than the income tax base because the State pension is exempt from USC, and this comes to €6 billion. At the top of the income distribution, the USC base is wider on average by approximately 5%. There are large variations in the category. Some people would not use tax reliefs while others use significant amounts. That was probably a positive. Like many issues in this area, it is complicated.

Mr. Cormac Staunton

TASC has done an analysis on the potential for a third income tax rate. I understand Professor FitzGerald’s points about making marginal rates too high. Because of the way the tax system is structured, there is an opportunity for tax on incomes above €100,000. The Government could raise €360 million from a tax of 60% on people's incomes above €100,000.

Senator Marie-Louise O'Donnell

Is that right?

Mr. Cormac Staunton

It is a figure from the Revenue Commissioners.

Senator Marie-Louise O'Donnell

It sounds a bit like Sinn Féin, without the background.

Chairman

What would be the rate? How would it be achieved?

Dr. Donal de Buitléir

It might be 60% plus USC plus PRSI, so the effective marginal rate would be 72%.

Mr. Cormac Staunton

No, the marginal rate would be 60%.

Senator Marie-Louise O'Donnell

Good luck with that on the hustings.

Mr. Cormac Staunton

It would be capped at 60%. In terms of looking for ideas and crocks of gold, it is worth exploring.

Senator Marie-Louise O'Donnell

If you are looking for gold, good luck on the hustings with it.

Mr. Cormac Staunton

Social insurance is another area we need to consider. We have one of the lowest rates of social insurance in Europe. Our rate is higher than Denmark's, and Denmark does not really use social insurance but pays everything through the tax system. If one did more with social insurance rather than tax, one could solve some of the issues and bring social insurance into these discussions about tax and USC.

Senator Marie Moloney

It is income tax by another name.

Mr. Cormac Staunton

It is different from income tax because one receives benefits from it that are related to how much one pays in.

Senator Marie Moloney

PRSI goes to the Department of Finance, not the Department of Social Protection.

Mr. Cormac Staunton

The role of social insurance in Ireland and the fact that it is low compared to other countries needs to be addressed, although maybe not today.

Senator Marie-Louise O'Donnell

Good luck with that on the hustings also.

Mr. Cormac Staunton

The other issue with regard to social protection is its adequacy. Today, the CSO's SILC numbers show that the deprivation rate - people who had experienced two or more types of enforced deprivation - has increased from 26% of adults in 2012 to 30%. Given that the previous SILC numbers showed a deprivation rate of 50% for people in receipt of jobseeker's or disability benefits, I imagine the deprivation rate for people whose main source of income is social welfare has increased above 50%.

Chairman

What is the Gini coefficient?

Mr. Cormac Staunton

It is approximately level.

Chairman

So it is static.

Mr. Cormac Staunton

Yes, the Gini coefficient has stayed the same.

The level of deprivation has increased from one quarter to almost one third of adults. In addition to examining the position on inequality, the issue of adequacy must also be addressed. That in itself is a form of inequality.

Chairman

Previous reports indicated that the people affected by the increase in deprivation were not necessarily those at the bottom but rather those higher up. I refer to what might be termed as the "coping classes".

Mr. Cormac Staunton

Yes.

Senator Marie-Louise O'Donnell

This has been a most informative debate.

Chairman

Yes, it really has. Unfortunately, we are competing with both the Seanad which is discussing the Gender Recognition Bill and the Dáil and certain members were obliged to leave. It was great, however, that we were able to engage in such an informative discussion. Our guests would have tended to appear before the Joint Committee on Finance, Public Expenditure and Reform to discuss the issue of tax implications. This committee can discuss matters from a social protection point of view. I thank our guests and committee members for attending.

The joint committee adjourned at 3 p.m. until 1 p.m. on Wednesday, 28 January 2015.