Irish tax and welfare system offset income inequality, ESRI finds

Ireland’s tax and welfare system reduced income inequality in the wake of the 2008 financial crisis, according to a study by the Economic and Social Research Institute (ESRI).

The research found that “automatic stabilisers” – the reduction in tax and increase in welfare payments that naturally arises in a downturn – offset the rise in income equality.

It also found that these stabilisers - often regarded as the economy’s first line of defence in a crisis - played a larger role, particularly through the benefits system, at reducing inequality than discretionary government policy at the time.

In the current Covid-19 crisis, governments here and elsewhere have gone a step further than allowing “automatic stabilisers” serve as a buffer against the shock, introducing a system of direct wage supports to counteract the fall-off in employment.

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Crisis countries

The study - entitled What drove income inequality during the great recession? - examines the impact of the tax and benefit policy on income inequality in the five worst-hit euro zone economies - Ireland, Greece, Portugal, Italy and Spain.

Inequality in market income - income before taxes and transfers - increased significantly in each of these “crisis countries”between 2007 and 2013, the study found, due to rising levels of unemployment and wage cuts.

However, inequality in disposable income - income after taxes and transfers - fell or was broadly stable in each country bar Spain.

“Thus, tax benefit systems did much to cushion income inequality in these countries during the Great Recession,” it said.

This is because each country made their tax systems more progressive during the crisis - progressive means workers on higher incomes pay relatively more tax than those on lower incomes.

“In each country, the effect of automatic stabilisation was larger than that of discretionary policy and, in some countries (Portugal and Greece), its magnitude was comparable to that of market income changes,” it said.

Existing benefits

In Ireland, Portugal and Greece, existing benefits cushioned the shock to market income to the extent that inequality decreased or was relatively stable between the beginning and the end of the crisis, the study found.

"These findings tell us that the success with which four of the five crisis countries maintained stable levels of income inequality during the Great Recession was mainly thanks to their pre-existing benefits systems," the study's author Karina Dooley said.

“Countries which devoted more resources to unemployment supports, such as Ireland and Spain, were also those in which unemployment protection played an important role in cushioning inequality,” she said.