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Poor lose, and rich gain from direct tax and benefit changes since May 2010 – without cutting the deficit

New analysis from LSE and the University of Essex shows that the poorest groups lost the biggest share of their incomes on average, and those in the bottom half of incomes lost overall, following benefit and direct tax changes since the 2010 election. 

The analysis also shows:

  • The outcome for those in the bottom half of incomes is in contrast to those in the top half of incomes, who gained from direct tax cuts, with the exception of most of the top 5 per cent – although within this 5 percent group those at the very top gained, because of the cut in the top rate of income tax.
  • In total, the changes have not contributed to cutting the deficit.  Rather, the savings from reducing benefits and tax credits have been spent on raising the tax-free income tax allowance.
  • The analysis challenges the idea that those with incomes in the top tenth have lost as great a share of their incomes as those with the lowest incomes. John Hills2

The research, co-authored by LSE's Professor John Hills, suggests that who has gained or lost most as a result of the Coalition’s policy changes depends critically on when reforms are measured from.

Treasury analysis, suggesting that those at the top have lost proportionately most, starts from January 2010 and therefore includes the effects of income tax changes at the top announced by Labour in 2009, and which took effect in April 2010, before the election. But if the Coalition’s impacts are measured comparing the system in 2014-15 with what would have happened in the system inherited in May 2010, they have a more clearly regressive effect.

This resulted from the combination of: changes to benefits and tax credits making them less generous for the bottom and middle of the distribution; changes to Council Tax and benefits from which those in the bottom half lost but the top half gained; higher personal income tax allowances which meant the largest gains for those in the middle, but with some income tax increases for the top 5 per cent; and the ‘triple lock’ on state pensions which were most valuable as a proportion of their incomes for the bottom half.

Some groups were clear losers on average – including lone parent families, large families, children, and middle-aged people (at the age when many are parents), while others were gainers, including two-earner couples, and those in their 50s and early 60s.

Professor Holly Sutherland, report co-author and Director of EUROMOD at the Institute for Social and Economic Research (ISER) at the University of Essex commented: “It is striking how seemingly technical issues or minor differences in assumptions like which tax system is taken as the starting point for Coalition reforms, or whether to assume 100% take-up of benefits, have very big implications for what we conclude about whether the rich or the poor were harder hit.”

Professor Hills added: “What is most remarkable about these results is that the overall effect of direct tax and benefit changes under the Coalition have not contributed to cutting the deficit.  The savings from benefit reforms have been offset by the cost of raising the tax-free income tax allowance.  But those with incomes in the bottom half have lost more on average from benefit and tax credit changes than they have gained from the higher tax allowance.”


NOTES

The full report is available here: 
The distributional effects of the UK Coalition government's tax-benefit policy changes|

Report authors:

Paola De Agostini is Senior Research Officer at the Institute for Social and Economic Research (ISER) at the University of Essex.

John Hills is Professor of Social Policy and Director of the Centre for Analysis of Social Exclusion (CASE)| at the London School of Economics.  

Holly Sutherland is Research Professor and Director of EUROMOD at the Institute for Social and Economic Research (ISER) at the University of Essex.

The paper was prepared as part of CASE’s Social Policy in a Cold Climate programme http://sticerd.lse.ac.uk/case/_new/research/Social_Policy_in_a_Cold_Climate.asp|, which is funded by the Joseph Rowntree Foundation, Nuffield Foundation, and with London-specific analysis funded by the Trust for London.  The views expressed are those of the authors and not necessarily those of the funders.  The analysis uses the tax-benefit model, EUROMOD, based at the University of Essex https://www.iser.essex.ac.uk/euromod|.

For any other information please contact Joanna Bale, Senior Press Officer, LSE, on 07831 609679 or j.m.bale@lse.ac.uk|, or LSE Press Office on 0207 955 7060, or Louise Cullen, Communications Manager, ISER, University of Essex, 01206 873087 or 0777 1792 393, or lcullen@essex.ac.uk|.

 

16 November 2014

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