Wednesday, 3 October 2012

The top 20% DO account for 70% of net contributions to the state

So, a former boss (or boss of the boss of my boss!) from the early days of my career has been having a twitter to-and-fro with Allister Heath and Nelson Fraser over the progressivity of our (the UK's, not Spain's) tax system.  His final authoritative word on the issue goes beyond the initial assessment from Full Fact by quoting this very interesting factsheet on the impact of tax and benefits put together by the ONS earlier in the year.

But, whereas his exposition of the evidence is flawless I find his final conclusion wanting.  The point of his article appears to be two-fold: (1) to demonstrate that using income tax only gives a partial view of the progressivity of the tax system; and (2) that once a broader view is taken the system is not as progressive as would have been concluded.

Now, the ONS gives us the data not just for taxes paid but also for benefits (both direct and in-kind, e.g. the state schooling that my two children are currently receiving at an approximate cost of £7,000 each).  And Portes warns us to focus on non-retired households for a more accurate view.  So I have produced the following chart:

The story we get does not differ substantially from that which you would get by looking at the income tax story:

(1) For the lower 40% living in the UK with the current tax arrangements provides a substantial boost to their incomes.

(2) The middle quintile are indifferent - the tax they pay is broadly what they would otherwise have to pay for the public services they receive (incidentally, I would expect the small surplus shown in the chart for this quartile to turn into a deficit if we factored in the value of the promise of a future state pension).

(3) The 40% of households with the highest income are the only net contributors to the system, with the top quintile accounting for 70% of all net contributions (the difference between the dark and the lighter blue bars).

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