How Regressive is Our Tax System?

This close to a Budget there is a depressing inevitability about the calls for a cut to the top rate of income tax. If the usual suspects have their way, 45p will become 40p, effectively providing a tax cut for the very well off and the incredibly rich. Just the people who need it then. 

If we ever needed confirmation of just how ridiculous and unfair our tax system is it came today in the Office for National Statistics’ ‘effects of taxes and benefits on household income’. A dry sounding document, but one packed with interesting data on how much tax households with different incomes pay. 

This shows that the poorest 10% of households now pay over 10% more of their income in tax than the richest 10%. The poorest households pay almost half of their total income (45%) in tax whilst the top 10% pay just over a third (35%).

The truth is that while our increasingly meagre benefits system does indeed help the poorest, our regressive tax system then effectively takes much of this support away. 

A perfect example of a poorly designed regressive tax is Council Tax. The Institute for Fiscal Studies’ Paul Johnson even described it as “being deliberately regressive in its design”. Local councils pay out Council Tax Support to those with the lowest incomes to help compensate for this, but the budget for this support was slashed in the year that latest figures cover.

The result is that Council Tax[1] now hits the poorest harder than it has since the ONS began measuring Council Tax Support[2]. The poorest lose 8% of their income to the Council Tax system whilst the richest only lose 2%.

However rather than reforming Council Tax the government has been focusing on Income Tax, mainly through a promise to raise the personal allowance. This will not only cost billions of pounds, but most of the benefit will go to households in the top half of the incomes spectrum. Those in the poorest households will gain little as Income Tax isn’t one of the most important taxes for them. People in the bottom 10% pay more in Council Tax, VAT and Tobacco duty than they do in income tax. They pay almost three times as much in council tax as they do income tax and almost five times as much in VAT. 96% of people support making our tax system more progressive.

Reducing the top rate of income tax is a policy idea seemingly impervious to economic reality or reasoning. But it cannot be right to advocate policies that will further increase inequality between the poorest and the rest. If the government is serious about helping reduce the tax paid by those on the lowest incomes it needs to resist such calls and instead look at the taxes that actually affect them.