Tax and benefit changes ‘prompt rise in inequality’

17 Apr 15

There are signs that inequality in the UK is beginning to rise again following tax and benefit changes introduced since 2010, an economic analysis has found.

The study by the Centre for Economic Performance found there was a fall in inequality following the financial crisis of 2008 as average wages and incomes fell across the wealth distribution.

However, since 2010, the coalition’s tax and benefit changes, which include a £26,0000 household benefit cap and limits in annual increases, had been largely regressive, the report said. People in the bottom half of the income distribution lost more than they gained from other changes, such as the hikes in the income tax personal allowance.

The analysis also found net income – after tax and benefits – was more equally distributed than pre-tax and benefit income. The richest fifth have 15 times the pre-tax income of the poorest fifth, but only four times as much after taxes and benefits.

Welfare changes were likely to increase inequality, report author and assistant professor of economics at the London School of Economics Gabriel Zucman stated.

‘Inequality of net income fell in the crisis as the welfare system “did its job”. But there are signs that it is rising once again and the tax and benefit changes since 2010 have been largely regressive.

‘Perhaps the main cleavage is between pensioners who have done relatively well compared with those of working age, especially the young and households with children.’

He added that the Labour Party’s election pledge to abolish non-domiciled tax status would reduce inequality, but the Conservatives’ policy of boosting inheritance tax allowances could increase it.

‘To combat wage inequality, increasing skills, especially for the disadvantaged, is vital,’ he added.

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