Highlight text to annotate itX
This is a podcast, showing the effects of taxes and benefits on income
inequality. For a transcript email email@example.com .
To begin with we will look at what makes up household income. Our starting
point is original income, which is income before taxes and benefits.
This is made up of wages and salaries, self-employment, private pensions
and investments. Adding cash benefits, for example, the state
pension or those related to unemployment, gives us gross income.
Subtracting direct taxes, for example, income tax and council tax, gives
disposable income. Taking off indirect taxes, which are those
paid when spending, such as VAT, leaves us with post tax income.
We calculate household incomes for these four stages to show how incomes
are affected by taxes and benefits. We can also use these estimates to look at
how incomes vary between the richest and the poorest households, which is known as the level of income inequality.
We can measure inequality on a scale of 0 to 100. To explain this, consider an
example where there are five households in a street. If we give the street a
total income of £100,000 and allocate each household an income of £20,000,
this means that the total income for the street is equally distributed. Therefore
the level of income inequality is zero per cent. Or in other words, there is no
inequality of income. Now, let's take the same street, with the
same five households and the same total income of £100,000. If one household
received all of the income, and the other households have no income, then income
inequality is 100 per cent, and there is complete inequality of income.
We will now look at the level of income inequality from 1980 to 2009, and the
effect that taxes and benefits have on these figures.
This first line shows original income and in 1980, original income inequality
stood at 44 per cent. Over the past 30 years it has increased and in 2009 it
stood at 52 per cent. All of the increase in inequality happened
during the 1980s and early 1990s. This increase was mainly caused by faster
growth in wages and salaries for the richest households compared with the poorest.
Since the early 1990s through to the latest period, the level of
inequality of original income has remained quite stable.
When cash benefits are included they reduce the level of income inequality.
This is because very little cash benefits go to the richest households. Looking
at the level of income inequality for gross income, which is income after
adding in cash benefits, we see the fall in income inequality.
In 1980 the inequality for gross income stood at 31 per cent, 14 percentage
points lower than for original income. While income inequality increased over
the period, to 37 per cent for gross income in 2009, cash benefits had a
slightly bigger impact on reducing inequality, reducing it by 15 percentage
points. Like cash benefits, direct taxes also reduce
the level of income inequality. This is because richer households tend to
pay more of their income in direct taxes than poorer households do. However,
the reduction in inequality caused by direct taxes is smaller than the reduction
caused by cash benefits. In 1980 direct taxes reduced income inequality by
3 percentage points, and in 2009 the reduction was 4 percentage points.
The last stage is the effect that indirect taxes have on the level of inequality.
Indirect taxes increase the level of income inequality, because poorer
households tend to pay more indirect taxes as a proportion of their income
than richer household, even though richer households pay more indirect
taxes. We can see this as income inequality for post tax income is above that
for disposable income. In 1980 indirect taxes increased inequality by 2
percentage points and from the mid-1980s onwards by around 4 percentage
points. So we see that overall, taxes make little
difference to income inequality. This is because direct taxes reduce inequality
and indirect taxes increase inequality by roughly the same amounts.
The information comes from the Living Costs and Food Survey, which is a
survey of around 5,000 households across UK. The survey asks about the things that people
spend their money on and the income they receive. This allows us to estimate
the level of income inequality and how it is affected by taxes and benefits.
Further information can be found in 'The effects of taxes and benefits on
income inequality, available at the link here. For any queries about this podcast, please