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September 11, 2007

Fun With Statistics: TUC Edition!

Via Richard Murphy we get this, a fun filled list of ten things you didn't know about inequality. Number nine is especially interesting.

The richest fifth pay £18 tax on every £100 of disposable income, while the poorest fifth pay £30. (HMRC direct and indirect tax).

How can that be? We know that income taxes are higher for the richest than the poorest, so how can this be?

Aaah. The secret is in the word "disposable". Disposable income means what you can spend after income taxes, NI (and yes it does include any benefits you might get, either directly or via the tax system) and housing costs have been deducted.

So, in order to make our comparison we're going to look at the numbers without including the higher income taxes the richer pay because they have higher incomes. Pretty good, eh?

Oh, but wait! There's more! The poorest fifth pretty much don't pay income tax (although they do NI, much to the shame of the tax system)....but they do get things from the benefit system. Certainly, for a large majority, if not all of the poorest fifth, the tax and benefit system supplies them with disposable income, not reduces it.

So if we were to look at actual taxation numbers leading to disposable income, our top fifth would be paying £40 to £50 per £100 ( dependent upon difficult to work out things like the elasticity of something or other to do with Employers' NI contibutions plus income tax, and based of course on the last tranche of their earnings) and our poorest fifth probably a negative number, say, just for illustration, -£20 per £100.*

But no, we'll ignore the progessivity of our income tax system and benefits system and that's how we'll make up our figures, eh?

OK, now, let's assume that everything above is entirely wrong. Wouldn't be the first time that I've got the wrong end of a stick, after all. So let's say that the TUC figures are exactly correct, with no distortions at all. It really is true that from the money they have available to spend, the poor pay a higher tax rate than the rich. What could be the explanation of this?

Well, that would be that consumption taxes are in fact regressive. VAT is a little more complex as food is zero rated...but we know that the poor spend a greater portion of their incomes on things like heating, light, petrol and so on, than the rich do (quite apart from anything else, whatever the rich save isn't subject to VAT). We also know that the poor spend a greater portion of their incomes on booze and smokes than the rich do: and you should try looking up the duty rates on those.

So what the TUC appears to be complaining about is the fact that duty on petrol, tabs and lickker are too high.

Well, quite agree, right on Brothers. First TUC campaign I've ever been able to get behind.

* Would be interesting to know what that number is actually.

September 11, 2007 in Taxes | Permalink


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Could you explain this comment? Surely if you measured it as a % of pre-tax income the comparision would favour the rich even more?

So, in order to make our comparison we're going to look at the numbers without including the higher income taxes the richer pay because they have higher incomes. Pretty good, eh?

Tim adds: No, if we took all income and then calculated the taxes paid on it it would show up the higher income taxes the high income eraners pay. That's why they've used "disposable" income. Because our income tax system os progressive, out benefits system progressive, but our direct taxation system regressive. Which is what they wanted to show, which is why they did it ths way.

Posted by: Matthew | Sep 11, 2007 3:47:43 PM

So it doesn't include direct taxes?

Tim adds: The TUC calculations, no they don't.

Posted by: Matthew | Sep 11, 2007 5:02:30 PM

Backing up Tim on this, it does look as though they've simply assumed that VAT is 17.5% on everything and then used the fact that (for income earned from employers) earnings above the upper limit for NI are 1% versus 11% for those below.

As a calculation, to get £100 of "disposable income" (ie post tax) at higher rate, you have to earn £166.67.

This gives £100 post tax and £98.33 after NI (1% of £166.67 taken off).

Your remainder gets spent on VAT-rated goods, so you pay a further £17.21 VAT (leaving you with £81.12
Which corresponds to 18.88% (if you were trying to make a point, you'd ignore the numbers after the decimal place).

For those on lower-rate tax and 11% NI, we'd need £128.21 to get post-tax £100. Take off a further £14.10 in 11% NI, and we've got £85.90 left.
Deduct 17.5% of £85.90 (£15.03) and we've got £70.87 left. Deduction of £29.13 per £100. Pretty close to £30.

Now, of course, the actual total lost by the higher earners is £66.67 in top-rate tax + £1.67 in NI + £17.21 = £85.55 per £166.67. Dividing by 1.667 to get a £/£100 rate, that gives £51.32 deducted per £100 of marginal income.

The actual total lost by the lower earners is £28.21 + £14.10 + £15.03 = £57.34. Dividing by 1.2821 to give a £/£100 gives £44.72 deducted per £100 of marginal income.

Saying that the rich get to keep (after income tax, NI and VAT) about 48% of what they earn and the poorer keep 55% or so merely highlights the colossal amount taken in tax - which would probably not be what they were aiming for ...

Posted by: Andy Cooke | Sep 11, 2007 8:54:18 PM

The poor get shafted both ways, the left want higher taxes on everyone and the right want lower taxes for the rich. There's hardly anyone calling for tax cuts specifically targeted for the lower paid.

For example, the moral premise behind the minimum wage is that it's the lowest income that our society considers it acceptable to be paid (I know that you disagree with the NMW but bear with me here). But a full time worker on minimum wage earns around £10,700 per year and out of that pays £940 Income Tax (soon to go up with the abolition of the 10p rate) and £700 National Insurance. Where's the sense in taxing someone right at the bottom of the heap?

Then to make things even more surreal, we have Working Tax Credits to give tax back to the low paid. Wouldn't it just be easier to up the personal allowance to the level of full-time minimum wage and then put the basic rate back up to about 25%?

Tim adds: I think you'll find that it's organisations on the "right" , like the Adam Smith Inst, who do favour such plans. Their tax proposal for example is to make the personal allowance £14 k. Taxing the working poor to give them credits back is indeed a silly way of doing things.

Posted by: DM Andy | Sep 12, 2007 7:20:58 AM

I don't know DM Andy, the ASI and the like call for a doubling or even tripling of the personal allowance, a step that would massively help the poor most of all. It's absurd that one can pay Income tax while on the minimum wage.

Posted by: Andrew Paterson | Sep 12, 2007 8:53:18 AM

DM Andy, UKIP also call for personal allowance to be doubled. Roughly.

Posted by: Mark Wadsworth | Sep 12, 2007 10:09:20 AM