National Statistics Online - Articles - The effects of taxes and benefits on household income 1997-1998
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The effects of taxes and benefits on household income 1997-1998
How taxes and benefits redistribute income, where different types of household and individuals are in the income distribution and the changing levels of income inequality over time.
This article looks at how taxes and benefits redistribute income between various groups of households, shows where different types of household and individuals are in the income distribution and examines the changing levels of income inequality over time.
Government intervention, by means of taxes and benefits, alters the incomes of households and tends to reduce the differences between households. Before this intervention, the top fifth of households have an average of £51,000 from original income (that is from sources such as earnings, occupational pensions and investments). This is around 17 times as great as the figure of £2,900 for the bottom fifth. However after taxes and benefits the ratio is greatly reduced to four to one.
Cash benefits play the largest part in reducing inequality. These make up more than two thirds of the gross income for the poorest fifth of households. Households also receive benefits in kind from services provided by government such as health and education.
Direct taxes, except for local taxes, are progressive - they take a larger proportion of income from those higher up the income distribution - therefore they also contribute to a reduction in inequality although not to the same extent as cash benefits. Indirect taxes have the opposite effect to direct taxes taking a higher proportion of income from those with lower incomes.
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