They criticize Gordon Brown for making things complicated. Means testing is held out as an example of a measure that costs too much to administer – or so some say, and the flat taxation brigade site these costs of administration as one of the big benefits of imposing a one for all tax system. But on Friday, the Office of National Statistics revealed the other side to the argument. Cash benefits, such as Income Support, Child Benefit, Incapacity Benefit, and the state Retirement Pension are making the distribution of income in the UK, a lot more even.
Back in the ’70s and early ’80s, the gap between the rich and poor before taxation was smaller. But under the Thatcher era this slowly changed. By 1987 the average income of the wealthiest 20% of the UK populace was 21 times greater than the poorest 20%. Today, and despite massive city bonuses reported in the press most weeks, the difference is sixteen fold. Apparently, the average salary for the top 20% is now Â£66,300, but just Â£4,300 for the poorest 20%.
But after taking into account the effect of taxation and benefits, it’s a much closer call. And it’s benefits, rather than taxation that has the main distribution effect. According to our official compiler of statistics, cash benefits make up 60 per cent of gross income for the poorest fifth of households, 36 per cent for the next group, falling to 2 per cent for the top fifth of households. And after the effect of taxation and benefits is taken into account, the ratio between the top 20% and the bottom 20% is just four to one.
Apparently taxation has little effect. Although income tax is progressive, meaning the more you earn the more you pay, VAT tends to hit the poorer harder. In the year just ended the top fifth of households paid 25 per cent of their gross income in direct tax while the bottom fifth paid 10 per cent But this distributive effect, was partly cancelled out, by the impact of indirect taxes. For the top fifth of households, indirect taxes account for only 11 per cent of gross income, compared to 27 per cent for the bottom fifth.
© Investment & Business News 2013