Making poor people poorer

Why do those concerned about low incomes never criticise sin taxes?

By Rob Lyons

The UK Office for National Statistics (ONS) has released a new report on the state of household finances. The Effects of Taxes and Benefits on Household Income, 2011/2012 contains many valuable nuggets of information and different commentators across the political spectrum have found something to gloat about.

So, for example, in a pointed prod at left-wing journalist Owen Jones, Toby Young in the Telegraph blogs about the fact that income inequality has fallen in recent years, to the point where one measure of inequality, the Gini coefficient, is now back to 1986 levels. On the other hand, left-leaning Twitter users have noted that tax takes a bigger slice of income for the poorest 20 per cent of the population (36.7 per cent of gross income) than it does for the top 20 per cent of earners (34.5 per cent of gross income). (See this snapshot from the report.)

How can that be? The difference comes from indirect taxes - that is, taxes on expenditure rather than income and property. On income taxes alone, the richest 20 per cent pay three-and-a-half times as much tax, as a proportion of income, than the poorest. Yet that progressive taxation is completely reversed by the effect of tax on spending. The biggest expenditure tax is value-added tax (VAT) at 20 per cent. For poorer people, over 10 per cent of their gross household income goes on VAT. So cutting VAT would be a big boost to lower-income groups.

But nearly seven per cent of gross income for poorer people goes on what might be loosely defined as ‘sin’ tax - that is, tax on boozing, smoking and driving. If you really wanted to help out households that are strapped for cash, you could start by reducing taxes that are justified as an attempt to change our bad habits. However, it seems unlikely that anti-poverty groups will have much to say on the matter.