National Statistics Online - Articles - The effects of taxes and benefits on household income 1998-99
Articles Database
The effects of taxes and benefits on household income 1998-99
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 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. Before government intervention, the top fifth of households have an average of £51,000 per year in original. This is around 17 times as great as the figure of £2,900 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, with the poorest two fifths receiving 60 per cent of the total. These households typically receive around £5,000 from cash benefits, representing around two thirds of gross income for the bottom quintile group and two fifths for the next group.
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, but 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. However the top fifth of households still pay more indirect tax in absolute terms than other households.
Download
