I ❤ redistribution
You know you’re a nerd when you’ve got a favourite statistic, but you only know you’re a full geek when you can’t stop telling people about it.
I’ve really got to write about The Effects of Taxes and Benefits on Household Income, even though it came out last week. I was away on the 29th (I can bring a note …) but it’s only published once a year and I don’t want to let this year’s edition go without some comments on it.
The point about this report is that it tells the story of how our welfare state reduces inequality. It looks at how the incomes of households change over five stages:
- Original income (earnings, investments, private pensions etc)
- Gross income includes tax credits and benefits (including state pensions)
- Disposable income, after deducting direct taxes (like income tax, National Insurance Contributions and Council Tax)
- After tax income is what is left after paying indirect taxes (like VAT)
- Final income adds in the value of services in kind (like health and education)
And the key point about this way of looking at things is that we can see the effect of direct and indirect taxes, benefits in kind and cash benefits. And we can see the massive inequality we’d have without the welfare state’s redistribution. The table below divides households into fifths (‘quintiles’) by income, from poorest to richest, with figures taken from the report. I’ve added in the ratio of the 3rd decile to the poorest and richest quintiles and of the top to the bottom.
You can see that, if we concentrate on original income and disposable income (which roughly equates to how much you’ve got to spend), you can see that the system reduces the inequality between the top and the middle by about a fifth and nearly halves that between the middle and the bottom.
Richer people pay more in indirect taxes than poorer people, but the difference is not as great as for direct taxes, and inequality in post-tax income is therefore rather higher than for disposable income. On the other hand, richer groups get a higher share of spending on benefits in kind than of cash benefits (though still less than poorer groups). The value of benefits in kind relative to post-tax income is much higher for poorer groups – they account for nearly half the bottom quintile’s final income but that figure falls to less than ten per cent for the richest quintile.
This redistribution is an important answer to the Prime Minister’s talk about a taxes and benefits “merry go round”. Of course we’d like a “high wage” society, but until the higher paying jobs are there, cutting benefits and taxes will plainly increase inequality.
If we look back at the successes of the last Labour government – which took 900,000 children out of poverty – while helping parents into jobs did play a role most of this progress was achieved because the system became more redistributive. Prof Mike Brewer, says that “the increase in financial support for families with children was crucial” and Prof John Hills has argued that the last government’s decision to move benefit resources from working age people without children to families with children was the main factor reason for the reduction in child poverty.
Yes, “predistribution” has a role. And yes, as a trade unionist, of course I want as much poverty reduction as possible to be achieved by ending low pay. But these are goals for medium-to-long term strategies.
What we face over the next couple of days is the dismantling of the features of the tax-benefits system that have been responsible for the (inadequate) reduction in inequality this country has achieved. And if that happens, inequality and poverty will eventually rise substantially.