IFS: Nine in ten pay more in tax than they receive in benefits over lifetime

22 Sep 15

More than 90% of people in the UK pay more in taxes than they receive in social security over their lifetime, according to research.

An analysis published by the Institute for Fiscal Studies today looked at how a lifetime perspective of the tax and benefit system changed the view of inequality, redistribution and reforms to entitlements.

The study, funded by the Nuffield Foundation and co-funded by the European Research Council, found that 64% of people pay more in tax than they receive in benefits when looking at a single snapshot year. However, most people experience considerable change over their lifetime, and those not in paid work in one year are often in work in another year, the study said.

The IFS said that the study showed that extending the period of analysis from a single year to an entire lifetime increased the proportion who pay more in taxes than they receive in social security to 93%.

The report concluded that more than half of the redistribution achieved by taxes and benefits is effectively across periods of life rather than between different people, as the tax and benefit system takes from an individual at one age and gives back to the same individual at another.

A lot of the income inequality between individuals is temporary in nature, reflecting either the stage of life they are at or some short-lived shock to income, such as a period of unemployment, the study found.

Barra Roantree, a research economist at the IFS and co-author of the report, said: “The sharp distinction often made in policy debates between ‘working’ and ‘non-working’ families is not especially useful. In reality very few individuals are permanently out of work, the poor are not always poor and, albeit to a lesser extent, the rich are not always rich.”

The figures include most personal taxes and benefits, but do not take into account ‘business taxes’ or the benefits from public service spending.

The tax and benefit system is less effective at reducing inequality over the lifetime than within each year, and its effectiveness at targeting lifetime outcomes is limited by the fact that most taxes and benefits are assessed over periods of a year or less, the Redistribution from a Lifetime Perspective report stated. This means that targeting outcomes over the short term is much easier than over longer periods.

The analysis also looked at the distributional effects of historical tax and benefit reforms. It concluded that while the Labour government’s expansion of in-and out-of-work benefits between 1999 and 2002 was less well targeted towards the lifetime poor than the ‘snapshot poor’, the losses from tax and benefit reforms of the Conservative-Liberal Democrat coalition between 2010 and 2015 are more evenly spread across the income distribution from a lifetime perspective. However, these reforms still take proportionally more from the poorest half of people, it concluded.

The report also analysed the distributional effects of hypothetical tax and benefit reforms. It found that changes to the higher rate of income tax target the lifetime rich reasonably well because rich individuals tend to remain rich over prolonged periods of time, while increasing the main rate of VAT looks close to neutral in distributional terms from a lifetime perspective. However, increases in VAT on zero- and reduced-rated goods was mildly regressive.

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