Income and income tax inequalities in Ireland – New evidence and further illustration of the progressivity of the Irish income tax system

Abstract

This paper presents new estimates of income and income tax inequalities in Ireland during 2001- 2012, using publicly available (grouped) data from the Revenue Commissioners. The analysis is based on a novel estimator for the Gini coefficient given grouped data developed by Abounoori and McCloughan (2003) and the income data pertain to income before taxes and social welfare payments. As expected, the Gini coefficient by gross income (‘market inequality’) is higher than that of income after taxes and transfers (‘net inequality’). The key findings are as follows. First, the Gini coefficient of gross income inequality has fallen since the crisis, in contrast to its rise pre-crisis. Secondly, the Gini coefficient of income tax inequality is much higher than that of gross income inequality, meaning that the share of all income tax among higher earners has been substantially larger than their share of all gross income. This implies that higher income earners have accounted for a much larger proportion of total income tax than their share of all gross income, and provides further illustration of the progressivity of the Irish income tax system, thus complementing existing research, including the Department of Finance’s assessment. Third, the wedge between the two Ginis has broadened since the crisis, meaning that the Irish income tax system has become even more progressive in recent years. Consideration of the policy implications of the results, and of complementary research, suggest little scope for increasing income tax in the coming years.