A recent report by the Institute for Fiscal Studies claimed that the previous conclusions published by the Office of National Statistics (ONS) were due to poor analysis of the statistics, claiming the UK tax system is more progressive than previously thought. Today, the ONS published its report on the effect of taxes and benefits on UK household income for the financial year ending 2018; and it seems it has been listening as the methodology has changed along with one of its main conclusions: Direct taxes (such as income tax) are progressive in reducing income inequality.
But is this simply a case of ‘Lies, damned lies, and statistics’, a phrase often, but incorrectly, attributed to that master of humorous fiction, Mark Twain?
The latest statistics clearly demonstrate that the direct tax system plays its part in reducing inequality. The richest one-fifth of the population pays 30.9 per cent of their income in direct taxation, compared with only 14.7 per cent for the poorest one-fifth.
However, delving further it becomes obvious that cash benefits play a much greater part in the redistribution of income. Benefits compose a much larger proportion of the poorest one-fifth of the population’s income, representing as much as 52.5 per cent of disposable income whereas the richest one-fifth of the population receives only 2.9 per cent of income from those sources. The proportion of people living in households receiving more in benefits than they pay in taxes continues to fall as it has since 2010. This is partly a reflection of the fall in value of benefits in real terms following the freezing of some benefits in 2016. But the report also highlights an overall increase in income from employment and self-employment (up 6.7 per cent in real terms) as contributing to this trend. No doubt the large increases in National Minimum and National Living Wage rates have also played their part.
Indirect taxes and council tax are all shown to be either regressive or neutral in achieving reduction in inequality.
As with all statistical analysis it is easy to get both distracted by the headlines and bogged down in the figures. But one fact remains: The report highlights that after all tax and benefits have been accounted for the ratio between the richest and the poorest has reduced to less than four – highlighting that the direct tax system is progressive.