Making taxes fairer can help to reduce and prevent poverty

By Adrian Sinfield, Emeritus Professor of Social Policy, University of Edinburgh

‘What thoughtful rich people call the problem of poverty, thoughtful poor people call, with equal justice, the problem of riches’ (Tawney, 1913).  Tackling inequality is an important part of tackling and preventing poverty.  Now even the IMF recognises the importance of tackling inequality, rejecting two basic excuses for not doing so that it has clung to for years.  Progressive taxes can help to reduce inequality and reducing inequalities does not inhibit growth (eg Guardian, 11 Oct 2017).

‘Inequalities of income and wealth are far too wide’ is acknowledged by the Scottish government in its consultation on its proposal to implement the socio-economic duty (see also McCrone, 2017). This is an important and welcome development, building on its Child Poverty Bill as well as Realising Our Potential and the Fairer Scotland Action Plan. The value of prevention is recognised: ‘we must prioritise expenditure on public services which prevent negative outcomes from arising’ (Scottish Government, 2017, pp 2 and 7, emphasis in original).

As part of this the Scottish government must ensure that taxing of all kinds does not operate in ways that reinforce existing inequalities. This requires collecting revenue to finance public services in a way that helps to reduce existing inequalities, not maintain them. But Revenue Scotland was not listed as a body to be responsible to the socio-economic duty in the consultation, nor was Audit Scotland, well-placed to monitor fiscal activities. This must change.

The assumption that taxes automatically reduce inequalities is pervasive but misleading. In practice the total UK tax system is not progressive: it has long been basically proportionate,. There is even a slightly higher incidence of total taxes on those with the least money. In 2015-16 the bottom fifth of households paid 35% of their gross income in all taxes, against an average of 33.4% and 34.1% for the top fifth (Tonkin, 2017, table 22 in the accompanying dataset; special Scottish analysis for the previous year, ONS, 2016).  Current changes to Scottish income and local taxes will not have altered the picture significantly.

  • So those with the least contribute proportionately slightly more to measures to reduce socio-economic disadvantage and to all other government spending. One major reason is the upside-down nature of the great majority of tax and national insurance reliefs and subsidies: they convey greater benefit to those better-off than to those with less, often much greater advantage. People paying higher rates of tax benefit more from these reliefs: a £1,000 relief saves someone paying 40% income tax £400 against the £200 received by those on the standard rate. The better-off also have more income to take advantage of any reliefs.
  • To give just one example the total net subsidy in income tax and national insurance reliefs to private pensions in the UK in 2015-2016 was £40.5 billion (HMRC, 2016). These estimates cost more than six times Pension Credit, the means-tested benefit for those over working age on low incomes, and is equivalent to 45% of the total spending on contributory State Pensions (DWP, 2016, table 1a). Despite recent reductions to the ceiling for income tax reliefs, some three-fifths of the tax reliefs on pension contributions continue to go to those paying above the standard rate of tax, or who would be without this relief (latest data, Hansard, 2014). This works to maintain poverty, not reduce, let alone prevent it.
  • At present, the Scottish government itself cannot change income tax reliefs or NI contribution exemptions, but this may not always be so. Meanwhile priority must be given to ensuring that the local taxes, Land and Buildings Transaction Tax and other taxes it controls operate with a properly progressive impact.
  • At UK level the tax systems must be made fairer (Byrne and Ruane, 2017). The National Audit Office and various select committees call attention to the inadequate management of tax reliefs (NAO, 2014 and 2016; PAC 2015 and 2016). It is not just the IMF that now provides support. OECD and the EC are both advocating greater transparency on tax reliefs and related subsidies (EC, 2014). OECD has openly argued for ‘removing or reducing’ those ‘that disproportionately benefit higher income groups’ to promote inclusive growth (OECD, 2016, p 51). We must take advantage of this growing support for a more vigorous attack on inequality and prevent poverty.

 

References

Byrne, D. and Ruane, S. (2017) Paying for the Welfare State in the 21st Century: tax and spending in post-industrial societies, Bristol: Policy Press.

DWP (2016) Benefit expenditure and caseload tables 2016, April

https://www.gov.uk/government/publications/benefit-expenditure-and-caseload-tables-2016

EC (2014) Tax expenditures in direct taxation in EU Member States, Brussels: European Commission, Occasional Papers 207.

Hansard (2014) Written Answer to PQ from Steve Doughty, 10 December.

HMRC (2016) Estimated costs of tax reliefs, KAI Data Policy and Co-ordination, HMRC, December 31.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/579690/Dec16_Reliefs_bulletin_Final.pdf

McCrone, D (2017) New Sociology of Scotland, London: Sage.

NAO (2014) The effective management of tax reliefs, HC 785, SESSION 2014-15, 7 November 2014.

NAO (2016) Report by the Comptroller and Auditor General, in HMRC, Annual Report and Accounts 2015-2016, London: HMRC, pp R1-90.

OECD (2016) Tax Design for Inclusive Economic Growth, OECD Taxation Working Papers 26, Paris: OECD.

ONS (2016) Taxes as a percentage of gross income, disposable income and expenditure for all households by quintile groups, 2014/15 Scotland, User requested data, 21 July

PAC – Public Accounts Committee (2015), HMRC’s performance in 2014-15, HC 393, Sept.

PAC (2016), HMRC’s performance in 2015-16, HC 712, December.

Scottish Government (2017) The Socio-Economic Duty: a consultation, July.

Tawney, R. H. (1913) ‘Poverty as an industrial problem’, reproduced in Memoranda on the Problem of Poverty, London, William Morris Press.

Tonkin, Richard (2017) The effects of taxes and benefits on household income: Financial year ending 2016, London: Office for National Statistics, April.

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