UK Taxes and benefits — more “equalising” than you think

“In the European context tax rates are high and government expenditure is focused on current expenditure. A ‘good’ consolidation is one where taxes are lower and the lower government expenditure is on infrastructures and other investments.” Mario Draghi

The rhetoric surrounding taxes and benefits in the United Kingdom (“UK”) over the last few years has broadly fallen into two categories.

The first that the Conservative Government has introduced and perpetuated an attack on the poorest in society whilst simultaneously kowtowing and handing our freebies to the wealthiest.

The second is that taxes have been too high and the benefits system had gotten out of control and needed to be reined in and put on a sustainable and footing.

These opposing views broadly reflect the philosophy of the UK’s two major parties on taxes and benefits.

  • Labour’s being a view of state control with high taxes and high government expenditure.
  • The Conservative’s espousing free markets, low tax and low government expenditure.

Philosophy is fantastic, but the reality “on the ground” is somewhat different to the rhetoric.

Naturally, if you listened to the Labour party, you would expect that our tax and benefit system does not reduce income inequality and only serves to perpetuate domination over the Conservative party and economy by the wealthiest in society.

I believe that by analysing the statistics, they are wrong.

Income redistribution

Looking at data produced by the Office for National Statistics (“ONS”), we are able to judge for ourselves the effects of taxes and benefits on UK household income for the financial year ending 2016.

The headline figure being the income ratio between the richest and poorest fifths of society.

Before looking at taxes and benefits, the average income of the richest fifth of households was 12 greater than that of the poorest fifth (12 to 1). This ratio is reduced to less than 4 to 1 after accounting for benefits and taxes.

To on one hand say that the Conservative Party’s tax reforms serve only the rich and then say that benefit cuts mean the poorest are getting poorer holds no merit when looking at the facts.

If this was so, the income gap would increase after the effect of taxes and benefits, not decrease from 12 to 1 to 4 to 1.

Direct taxes

In financial year ending (“fye”) 2016, on average, the richest fifth of households paid £20,100 in direct taxes (23% of their gross income) whilst the poorest fifth paid £1,600 (11% of their gross income).

Again, the wealthiest paying a higher amount and proportion of their income through our current tax system.

Indirect taxes

Where our tax system penalises the lowest paid is through indirect taxes and duties which are determined by expenditure and not income.

In fye 2016, the richest fifth of households paid 14.4% of their disposable income in indirect taxes, while the poorest fifth of households paid the equivalent of 27%.

This will be expenditure which includes VAT and duties on fuel and alcohol for example.

What you create with high indirect taxes (and a substantial level of direct taxes though things like Council Tax) is a society where the highest tax burden is not that which is levied on the highest earners in society, but the single parent or the low income four person family just about getting by.

They are ones unfairly targeted and who see a higher overall proportion of their income being spent on taxes and duties.

Hardly fair, hardly “progressive”.

Working for government

In the UK, we have a society dependent on government and therefore ironically, a government dependent on society (to provide it with the money it spends).

Due to the dire state of our public finances, government and politicians need to plug the spending gaps; and that is where we come in, the taxpayer.

The shocking confession left by Labour in 2010 saying, “I’m afraid there is no money”.

Instead of saving, or investing people’s money over the years, politicians squandered it and to pay the obligations government has built up over the years, it falls to the current and future generations to pick up the tab.

What this means for taxpayers is that on average, in fye 2016, households with a household head aged between 25 and 64 paid more in taxes than they received in benefits, with those in their late 40s on average paying the most in taxes (£18,300).

In fye 2016, 62.8% of non-retired households paid more in taxes than they received in benefits.

We have built a society where you are working for someone else. This is completely against the essence of the “free” society we love to talk about.

True freedom must include economic freedom as part of the package.

In conclusion

We can interpret from these statistics that:

  1. Our tax and benefit system goes very far in equalising incomes between the richest and poorest in society,
  2. If we want as a society to reduce the tax burden on the lowest paid, we should start by reducing our indirect tax rates, most notably VAT, and
  3. The UK is a society where through your working life, you are effectively working and paying taxes for someone else.

If we want to make the UK a fairer and freer society, one of the most powerful and liberating ways of doing this is through the taxes and benefits system.

Let’s put people in control of their finances and futures, not politicians.

The report titled, “Effects of taxes and benefits on UK household income: financial year ending 2016” can be accessed, here.