Britain’s Broken Tax System

Guest post by Professor Jonathan Bradshaw, School of Applied Social Sciences, Durham University

We are constantly being told by politicians and the press that the welfare system is broken. Actually cash benefits (and to a lesser extent spending on services) are the only part of the welfare state now reducing poverty and inequality in Britain. The tax system is the element of the welfare state that is broken – if anything is. It is time that this was recognised.

Figure 1 shows the proportion of gross income taken from each decile (of equivalent  income) in 2011/12. The bottom (poorest) decile group of households are paying 35% of their gross income in tax compared with 34% by the richest decile. The progressive effects of income tax and national insurance contributions are offset by the regressive effects of council tax (net of council tax benefit, VAT and other indirect taxes (duties on tobacco, alcohol, fuel, TV licences etc.)

Figure 1: Tax paid as a proportion of gross income – all households 2011/12.

Source: ONS (2013) The effects of taxes and benefits on household income, 2011/12 Table 14 http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-280824

Figure 2 gives the same results for households with children and Figure 3 for retired households.

Figure 2: Tax paid as a proportion of gross income – households with children 2011/12.

Source: ONS (2013) The effects of taxes and benefits on household income, 2011/12 Table 21 http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-280824

Figure 3: Tax paid as a proportion of gross income – retired households 2011/12

Source: ONS (2013) The effects of taxes and benefits on household income, 2011/12 Table 18 http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-280824

This situation has been getting worse over time. Figure 4 shows the percentage point difference in the proportion of tax paid by the top decile compared with the bottom decile in each election year since 1979. Thus in 1979 the top decile paid 13 percentage points more in income tax and 2 percentage points more in NI contributions by 2011/12 these differences had increased to 15 and 4 percentage points.  Direct taxes became slightly more progressive over the whole period. Meanwhile the indirect taxes became more regressive. In 1979 the bottom decile paid the same proportion of gross income in VAT as the top decile but by 2011/12 they were paying 7 percentage points more. Other direct taxes also became more regressive. Council tax remained regressive over the whole period – not becoming more regressive thanks partly to Council Tax benefit. We can expect to see it become more regressive now the Council Tax Benefit has been abolished.

Figure 4: Percentage point difference in proportion of gross income tax paid by the top decile compared with the bottom decile.

Source: ONS (2013) http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/historical-data–1977-2011-12/summary–historical-data–1977-2011-12.html

Figure 5 shows that the proportion of gross income taken by all taxes has fluctuated over the period but the proportion of the total taken  in income tax has fallen and the proportion taken in regressive taxes has risen. The Chancellor raised the income tax threshold in the last 2013 budget  – a measure which will not help the lowest income households who don’t pay income tax.

Figure 5: Proportion of gross income taken in tax. All households

Source: ONS (2013) http://www.ons.gov.uk/ons/rel/household-income/the-effects-of-taxes-and-benefits-on-household-income/historical-data–1977-2011-12/summary–historical-data–1977-2011-12.html

This situation can be summarised by observing the impact of taxes and benefits on original (market) income inequalities (as measured by the gini coefficient – 0 = maximum equality, 100 equals maximum inequality). Figure 6 shows that cash benefits achieve a big reduction in gini coefficients – the difference between original income (blue line) and gross income (red line).  Direct taxes achieve a little more reduction – the green line. Then indirect taxes increase the gini coefficient – roughly to the level of gross income ginis. Direct and indirect taxes cancel each other out.

Figure 6: Gini coefficients

Source: ONS (2013) The effects of taxes and benefits on household income, 2011/12 Table 27 http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-280824

Professor Jonathan  Bradshaw

jonathan.bradshaw@durham.ac.uk

You can follows Professor Jonathan Bradshaw on Twitter @ProfJBradshaw

Tackling child poverty locally – whose responsibility?

Today sees the publication of our first ‘Working Paper’ which looks at whose responsibility it is to tackle child poverty locally.

Local authorities and their partners are central to efforts to tackle poverty, and have been for many years. In the preface to South Riding, written in 1935, Winifred Holtby remarked that local government was ‘in essence the first line of defence thrown up by the community against our common enemies’ and identified poverty as the first of these enemies. In the 1990s, researchers noted that ‘a growing number of local authorities were actively engaged in anti-poverty work with local citizens, many as part of a formal corporate strategic commitment to this’ (Alcock et al. 1999). More recently, the local duties in the Child Poverty Act (2010) have required all local authorities to co-operate with partners to reduce child poverty and to prepare a Child Poverty Needs Assessment and a Child Poverty Strategy for its area and the government at the time argued that ending child poverty was ‘everybody’s business’ . The Coalition government emphasis on localism and decentralisation led to non–statutory guidance being issued in support of the local duties and this allowed local authorities to develop child poverty work in different ways and with different approaches.

The paper draws on evidence from reviews of current child poverty work and from work in the 1980s and 1990s which explored ‘anti-poverty’ work taking place in local autorities. The working paper can be accessed by clicking the link below.

NECPC Working Paper 1

If anyone would like any more information regarding the Working Paper, please do not hesitate to contact me.

There will be more to come….

Best wishes,

Steve

Doing the right thing….

One of the phrases from the government child poverty strategy that always sticks in my mind is around people who ‘do the right thing’. It is used to highlight how the welfare reforms and the ‘new approach’ to tackling child poverty will ‘reward’ these people. Below are the uses of the phrase in the strategy:

First, we must ensure that families can work themselves out of poverty – if they do the right thing we will make sure the system makes work pay.

The Universal Credit will support those who do the right thing, who take a full time job, to have an income which lifts them out of poverty.

… so that we create a system which rewards people who do the right thing and work themselves out of poverty

In the strategy, this approach is contrasted with the previous government’s approach which is characterised as being about attempting ‘to hit child poverty targets by paying out record amounts in welfare payments’ and an over-reliance on ‘simply throwing money at the symptoms’.

I recently came across a special issue of Local Economy from 1994 which explored ‘local anti-poverty initiatives’ and, from initial readings, a lot of the material is still very relevant today. This morning I read one of the articles, by Peter Alcock, called ‘Welfare rights and wrongs’ which examined the limits of local anti-poverty strategies and a couple of paragraphs seemed especially relevant to the ‘doing the right thing’ approach. Writing about poverty responses in times of economic recession and increasing poverty, he notes that:

At such times the problem of poverty becomes both morally more pressing and politically less containable. But recession also means that the expansive, and expensive, responses of better times are no longer available; and support from the state to the poor, the protection offered by employment and social security, is displaced by more limited support to working with poor people to seek their own solutions – an emphasis instead on from the poor to the state.

The shift in emphasis to working with, rather than for the poor, for all its success in promoting bottom-up community development and generating innovative and effective welfare rights activity, does mask the broader policy failure of economic development and social services in preventing the continuation, and the growth, of poverty in affluent welfare capitalist countries. What is more, despite the superficial attractions of the community base, in returning the problem of poverty to the poor people, it also risks a more sinister development — the pathologisation of poverty as the “problem of the poor”.

Nearly twenty years on from the publication of this article – amidst predictions of increased poverty in the coming years and the lack of evidence which supports the idea that this might be because more people are doing the ‘wrong things’ or, at the very least, not doing the ‘right things’, one could be forgiven for asking if our government was ‘doing the right thing’ by people who are living in poverty…