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The effects of taxes and benefits on household income, 2000-01
Article shows where different types of households and individuals are in the income distribution and looks at the changing levels of income inequality over time.
This article examines how taxes and benefits redistribute income between various groups of households in the United Kingdom. Government intervention, by means of taxes and benefits, alters the incomes of households. In general, households in the top half of the distribution pay more in taxes than they receive in benefits while the reverse is true for those in the lower half. Taxes and benefits therefore tend to reduce the differences between households’ incomes. Before government intervention, the top fifth of households have an average of around £55,700 per year in original income. This is around 18 times as great as the figure of around £3,100 for the bottom fifth. After taxes and benefits, the ratio is greatly reduced to four to one.
Cash benefits play the largest part in reducing inequality. The majority of these go to households in the lower part of the distribution. Direct taxes, except for local taxes, are progressive - they take a larger proportion of income from those higher up the income distribution. Indirect taxes have the opposite effect to direct taxes taking a higher proportion of income from those with lower incomes.
Trends over time suggest inequality of disposable income had flattened off by the year 2000/01, after rising in the second half of the 1990s. Inequality of disposable income was fairly stable in the first half of the 1980s but then increased rapidly and reached a peak around 1990. It then fell slightly in the first half of the 1990s.
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