The poverty of the inequality debate

The British public has been labouring under a false impression. The nation’s citizens foolishly believe that the rich pay the biggest proportion in tax from their incomes and the poorest pay the least. It turns out that this is completely wrong and what we actually have is a regressive tax system that favours the wealthy. What is required, say a new report’s producers, is political action to improve equality.

The report, Unfair and Unclear, published by the Equality Trust, reveals that the vast majority of people – 96 per cent of those polled – think the tax system should be progressive. In other words, the wealthier you are, the higher the proportion of your income should be taxed. However, while most people think this is the case, we’re wrong, it seems. Using figures from the UK Office for National Statistics (ONS), the press release for the report notes: ‘A household in the bottom 10 per cent pays 43 per cent of its income in tax, but the average household and a household in the top 10 per cent both pay 35 per cent – eight per cent less than the bottom 10 per cent.’

How on Earth can that be the case when income tax only starts when you earn ten grand a year and if you earn more than about £40,000 per year, you pay a higher rate? The report points out that this is more than compensated for by the regressive effect of other taxes. Most importantly, value added tax (VAT) adds 20 per cent to the cost of many everyday items, and five per cent to the cost of household energy (many foods are zero-rated, however). So, the greater the proportion of someone’s income that must be spent rather than saved, the greater the effect of VAT in reversing the progressive effect of income tax. Moreover, there is a cap on another form of direct tax, employees’ national insurance, which reduces the impact of higher-rate income tax. The tax levied by local authorities, council tax, is also very regressive.

But that’s not the full story. Another significant source of regressive taxation is tax on cigarettes, petrol and booze. VAT takes 11.6 per cent of the income of the poorest 10 per cent, but just 4.4 per cent for the top 10 per cent. Similar disparities exist in relation to ‘sin’ taxes: the poorest on average cough up 3.6 per cent in tobacco taxes, while the richest pay just 0.22 per cent. Fuel duty also has an impact, representing 2.2 per cent of income for the poorest, but just 0.74 per cent for the richest (despite having greater numbers of cars per household). If the government wanted to tackle poverty, an easy place to start would be to tackle the levies put on such expenditure. That would never do, however. Those taxes are there to restrain us from indulging our bad habits like smoking and driving. If anything, the demand is for both increases in current taxes and the creation of new ones, like a ‘soda tax’ on sugary drinks.

However, the simple disparities listed by the Equality Trust appear to miss something else important: welfare benefits and other income from government. Clearly, the poorest sections of society are also likely to be bigger recipients of these payments. After all, the question that most people will want to find an answer to from reports like Unfair and Unclear is really ‘Who pays in the most?’. That question should surely be answered by looking at net payments to government by taking into account both taxes and benefits.

Luckily, the ONS has looked at this, too. In its report on The Effects of Taxes and Benefits on Household Income, 2011/12, published in July 2013, the ONS states: ‘On average, households in the top two income quintiles paid more in taxes than they received in benefits, while households in the bottom three quintiles received more in benefits than they paid in taxes.’ Most people would argue that such a balance is as it should be, but one-sided reporting doesn’t help us get a clear understanding of the current situation. The fact that the Equality Trust report notes, almost as an afterthought, that ‘the lowest decile are net beneficiaries of the tax and benefit system’, but justifies its emphasis because ‘tax rates and benefits are debated and constructed largely in silos’, shows that getting the right message out about inequality was more important to the authors than a balanced view.

This infographic based on the report shows the importance of taking into account taxes and benefits in assessing inequality. Before taxes and benefits, the income of the top 20 per cent is 14 times higher than that for the bottom 20 per cent (£78,300 per annum versus £5,400 per annum). But after taxes and benefits, the ratio is much smaller. The well-off end up with four times as much as the poorest (£57,300 versus £15,800). That’s still not great, but the real problem is not that it is unequal, but that £15,800 – even with all that state support – won’t stretch very far.

Poverty, not inequality, is the real issue. All the more reason for the government to do the poor a favour and cut those consumption taxes.

Rob Lyons is associate editor of spiked.