Last week the ONS produced the latest version of its statistical bulletin, The Effects of Taxes and Benefits on Household Income, 2012/13'. What this shows, if we needed reminding, is that we do not live in a country with a progressive tax system and an excessively redistributive benefits system. The facts in this paper are squarely at odds with the assumptions of many on the right that the country's economic growth is being held back by high taxes on entrepreneurs and wealth creators and by a culture of benefit dependency amongst the poor:
The richest fifth of households paid £29,500 in taxes (direct and indirect) compared with £4,700 for the poorest fifth, though both groups paid a similar proportion of their gross income (35.1% and 37.4% respectively).
It is an inconvenient truth for many in the Coalition that even after large rises in the income tax threshold designed to make work pay, the poor pay a larger proportion of their incomes in tax than the rich. I suspect that the figure for the rich reduces more further, the further you go up the income distribution. That is, the richest 10% pay even less than the richest 20%, the richest 1% less than the richest 10% and so on. If my memory serves correctly, even Adam Smith thought that the fairest system of taxation was one where everyone paid the same proportion of their income in tax.
The main reason that the tax burden has been driven down the income distribution on to middle and lower income earners is because, over the years, more and more tax revenue has been generated from indirect taxes rather than from direct taxes like income tax. As the ONS explains:
The amount of indirect tax (such as VAT, and duties on alcohol and fuel) each household pays is determined by their expenditure rather than their income. The richest fifth of households paid just over two and a half times as much indirect tax as the poorest fifth (£9,100 and £3,500 per year, respectively). This reflects greater expenditure on goods and services subject to these taxes by higher income households. However, although richer households pay more in indirect taxes than poorer ones, they pay less as a proportion of their income. This means that indirect taxes act to increase inequality of income.
Thus, in 2012/13 the top 20% of households paid only 14% of their disposable income in indirect taxes while the bottom 20% paid more than twice as much – 31%, and this is up on what it was in 2011/12.
This has, of course, not happened by mistake. Rather, it is the result of a deliberate policy pursued by consecutive Tory governments going back to Geoffrey Howe's first budget in 1979 in which he raised VAT to 15% and cut income tax rates.
The other major cause of the tax burden being driven onto the less well-off is inequality of income growth, as even if everyone's taxes rise by the same percentage increase, but incomes rise faster for the well-off relative to the rest, then the tax burden on the rich reduces relative to that borne by everyone else. Welcome to the UK post 1977, as the ONS says:
However, incomes have not grown evenly across the income distribution. The average disposable income for the richest fifth of households in 2012/13 was just over two and a half (2.53) times higher than in 1977, once inflation and household composition were accounted for. The average income of the poorest fifth of households has also grown over this time, but the rate of growth has been slower (1.86 times higher in 2012/13 than 1977).
This is what this looks like graphically:
Growth in equivalised household disposable income, 1977 to 2012/13
So the richer are getting richer and paying less tax while everyone else is getting a smaller slice of the pie and paying more tax. And it may surprise some to know just how little the poorest households receive in benefits, relative, that is, to the richest 20%. In 2012/13 the poorest households received on average £7,154 in cash benefits, but the richest households received £2,666. When it comes to in kind benefits like health and education the gap is even narrower, with the poorest receiving £7,646 and the richest £5,403. This doesn't seem like redistribution gone mad to me.
If we have a problem in this country of a tax and benefits system that stifles hard work and free-market capitalism, then looking at these figures one wonders how much more of the tax burden currently borne by the rich will need to be passed onto the poor before the 'entrepreneurs' get up and do their thing.
PS. Here are two ONS infographics on taxes and benefits:
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