The Suffering of the Rich - Can You Feel It? The Recession Diaries - August 25th

There have been some outrageous and hilarious things said in this economic debate. I don’t know how economic historians will come to rank them. But surely at the top must be the claim that the rich have paid a ‘far higher price’ than other groups in society as a result of the economic downturn. You could dine out on that one for a long time.

This issue is not academic. In the run-up to the budget progressives will put particular emphasis on increasing taxation on high-income groups. There are two good reasons for this: first, because they have a lot of money and, second, because it will have a less deflationary impact on domestic demand than, say, taxing low-income groups or cutting public spending.

But would it be fair? If they have paid a ‘far higher’ price than other groups during the last couple of years are we in danger of victimising this hard-done-by group of individuals? Let’s look through some of the data, bearing in mind that information on income and wealth is sketchy and dated.

Job Losses

Losing one’s job is about as painful as it gets (apart from not being able to find one). We’re likely to find high income earners among the employer/professional groups. According to the Household Budget Survey, this group earned over 50 percent more than the national average. So how has the recession been for them? Not good, of course; but nowhere near as bad as other social groups.

No one wants to see employment losses in any category, but you’re more likely to escape the worst if you are in the higher-income groups. This is pain, but nothing like the rest of the workforce.

Income

Unfortunately we don’t have up to date data on income by deciles or social groups. So we’re going to have to do some knitting and hope the result is wearable.

We do know from the EU Survey on Living Conditions (SILC) that the highest income groups disproportionately benefited from income rises in the last few years. Whereas the average household saw their weekly income from work increase by €191 between 2003 and 2008, households in the top 10 percent benefited by €912. In good times, high income groups benefited the most. Can we assume that in hard times they will suffer the least?

The ESRI takes two measurements: aggregate wages and aggregate non-agricultural other income (non-farming self-employment, investment and capital income, etc.). Aggregate refers to the total amount in the economy and not an average. The ESRI estimates that between 2007 and 2011:

• Aggregate wages will fall by €10 billion, or 12.9 percent. This is due to a combination of unemployment, falling wages and reduced hours.

• Non-wage income, however, is expected to increase over this period: by nearly €2 billion, or 10.6 percent.

Can we deduce that this will benefit higher income groups? Reasonably so. SILC tells us that in 2008, the top 10 percent earned over 41 percent of all self-employment and other income.

If these estimates and proportions hold, then those at the higher end (at least when it comes to non-wage income) will have more than recovered and actually increased their income.

This doesn’t seem like too much pain.

Financial Wealth

It is uncontroversial to state that wealth, in particular financial, is concentrated in the hands of a few. How few and how much? The Bank of Ireland Private Banking states that the top 1 percent own 33 percent of financial wealth – but this is their estimate, based on UK patterns. Unfortunately, we have no government data. However, this doesn’t seem too far off considering that:

• In the US, the top 1 percent own over 50 percent of financial wealth
• In Spain the top 1 percent owned over 27 percent

So 33 percent is not too far off the pace. Even if it’s the top 2 percent, then we’re still looking at high concentration. What has been happening in the financial wealth areas (i.e. financial property for those who hanker after a ‘property tax’) and what should we expect to happen. We have the CSO and Goodbody estimates to help us out.

Just as we saw with non-wage income, we find that net financial assets will recover quickly after taking a substantial fall in 2008. If the Goodbody estimate holds, financial assets will exceed the pre-recession values, rising by nearly €50 billion from the 2008 low. This is another area where it is difficult to see much pain.

The Impact of Levies

Much emphasis has been put on the marginal tax rate that high income earners face with the increase in income and health levies and the PRSI threshold in the April 2009 budget. 8.5 percent has been added on to the marginal tax rate at the upper end. Surely, this could lead to all sorts of bad things – tax avoidance/evasion, capital flight, reduction in future investment. Not really. It only means a more even playing field.

The marginal tax rates – the rate at which an extra Euro is taxed (income tax plus levies) – are pretty much the same between average and high income earners. Ditto for the effective rate of the levies (the actual amount of levies paid as a percentage of income). If this is ‘pain’, then this is pain that most taxpayers have laboured under.

* * *

All the indicators show that high income groups have suffered relatively little pain (e.g. less job losses) and that they will recover quicker than the rest of the population; that the increases in levies only means that they are paying the same as average income earners.

Still, the myth of progressivity in the tax system persists, propagated for strategic purposes. In the run-up to the budget, progressives will be met with the argument that high-income groups have already been tapped enough; any more and there could be negative economic consequences. Therefore, we should look to other areas: spending cuts, bringing the low-paid into the tax net, water charges, etc. And if more deflation is the price of sparing the rich, then so be it.

The rich have paid a far higher price? That’s what some of our esteemed commentators say. But as Professor John Fitzgerald pointed out,

‘It doesn’t feel like that.’

Indeed.

Comments

[Paddy M]

Your original link (to 'far higher price') is missing.

[Michael Taft]

Thanks for that, Paddy M. I have corrected it.

[Hugh Green]

Thanks for this, Michael. I know it's wrong, but I'm looking at that 25bn increase in S.14+S.15 in 2009, and the 25bn decrease in S.13 for the same period, thinking 'how much of this correlation can we put down to causation?'

[Radler]

"If these estimates and proportions hold, then those at the higher end (at least when it comes to non-wage income) will have more than recovered and actually increased their income."

Michael don't you see that your conclusion follows immediately from your assumption that the gains from changes in the total unearned income will be constantly apportioned?

There's no reason to believe that deposits, dividends, rents and royalties will perform equally over the recession. On the contrary there is every reason to believe that they won't. Similarly there is no reason to believe that the different forms of unearned incomes are evenly distributed across the income deciles. For example small-time investors may be more likely to rely on deposit interest and buy-to-let rents, whereas high-rollers might have larger exposure to commercial rents and dividends.

Your line of reasoning smacks a little of ... if I assume I'll get the answer I want, then magically I'll get that answer. As long as my assumptions are reliable ;)

[Tomboktu]

Michael, may I suggest that you consider writing an op-ed piece for the Irish Times in response to the article?

[WorldbyStorm]

Radler, surely Michael has made it clear that not all of those on higher incomes are in clover.

Secondly, if we take your point about unearned incomes distributed being spread across income deciles (whether evenly or not) well, yes, but that doesn't contradict Michael's point either given that if they've lower incomes and faltering other incomes, then they're er... on lower incomes.

Which very slightly tangentially points to the reality that there's plenty of people who did unwise things financially in the last five or ten or fifteen years and came to depend upon revenue streams that were unsustainable - or put their trust in financial services that couldn't deliver.

[Tomaltach]

Good post. It seems to me that there is no question: in any recession those on low incomes and who have little or nothing in terms of a stock of wealth are going to suffer most. Fitzgerald's comment is wrong, pure and simple. I think your graph on job losses is the most stark reminder of where the pain lies. Having lost my job in late 2008, I understand the trauma of job loss.

The wealth distribution in Ireland is gross, no question. There are two ways to address this: the tax system and the structural factors in our society(elitism, education, inheritance, cronyism) which give rise to concentrated wealth.

The structural issues we can leave for another day. In terms of tax, the trouble is that when it gets discussed we hear one of two things: a) the rich are already highly taxed or b) the rich pay no taxes so lets apply more taxes. But in both cases people end up not really talking about the rich, but that broad spectrum of earners between say 40k and 100k. And in most cases the changes that are proposed kick in along these bands. The effective tax rate grows fairly progressively up to about the 100k point (when say for a single person it is around 40%) then it flattens here. Why? Many countries have banded rates much higher than that. The next problem is the reliefs - and to be fair the commission on taxation identified many sensible proposals there (and again the government avoided them). I'm thinking about pension, mortgage etc reliefs which, over time, should be seriosly reformed. Then there is the larger question of capital gains and corporation tax.

Another very worring development is the growth in indirect charges, effectively stealth taxes, which, along with our high proportion of VAT, hurt the progressivity in a serious way.

But certainly as it stands, the tax system is patently unfair and is begging for reform to make it much more just.

[Michael Taft]

Hugh - interesting observation, I missed that. It is certainly provocative. The EU/IMF 'bails-out' Greece: Greek workers get hammered and the shares of German/French banks (whose balance sheets were exposed to Greed debt) rose. Hmmm. The relationship between the assets of the state and those of high net-worth individuals is certainly one exploring. It may be opaque but that doesn't mean it isn't real and identifiable.

Thanks, Tomoboktu. I have, in other guises, been involved in submitting op-eds to several newspapers. To use a metaphor from my home country, my batting average is .090 (that wouldn't even get you a reserve place on a 4th division baseball team). But, I'll keep trying - on this and other issues.

Radler, I take your point. The problem is that all we have are assumptions because of the paucity of data on incomes and wealth (compared to other countries' national statistical compilation). That is why I tried to weave a number of data points together to paint a picture (the employment figures being the most current). What we are left with, given that each particular data issue comes with caveats, is a general picture. Is that picture reasonable? Or, more to the point, on the balance of probabilities which is more likely: that the rich have paid a far higher price or that their incomes and wealth will recover faster than the national average? I submit that it is the latter, but if you have data that throws some sceptical light on that, I'd certainly like to see it.

Just on the issue of income, the ESRI states that non-wage income (self-employment, capital & investment income, rents, etc.) will increase by 22% in 2011. Here is the proportion of that income by income deciles according to SILC in 2008:

1st (lowest): 0.9%
2nd: 1.7%
3rd: 2.8%
4th: 5.3%
5th: 6.0%
6th: 7.4%
7th: 9.6%
8th: 11.5%
9th: 13.6%
10th: (highest): 41.5%

Given the concentration of such income at the upper levels, I would submit that the recovery in non-wage income of the scale that the ESRI is estimating would have to disproportionately benefit the higher end. To what extent, of course, would have to wait for the data to come on stream.

Tomaltach, excellent points. I would certainly like to emphasise your contention that when many talk about the rich, what they are actually talking about is average to above average incomes, not the wealthy per se. Regarding tax, one small example which you refer to: mortgage interest relief. According to the Commission on Taxation, about €300 million (nearly 50%) of the cash benefit from mortgage interest relief goes to the top 20% income earners. Given that this grouping averaged €140,000 per year in 2008 (before tax), it is legitimate to ask whether this is economically efficient and / or social equitable. And I wouldn’t dismiss early action on some of the structural issues you identify – in particular, inheritances. This could be addressed through capital taxation (CAT). One could lower the thresholds substantially.

However, I fear that this Government is not likely to take the concerted actions which you are getting at. I also fear that the next Government won’t do so, either (not in any but a cosmetic way). I hope I am wrong but I live in a lot of fear these days.