Redistribution and the state

How much income redistribution does the state do? I ask because Jim at Our Word is our Weapon has criticized an earlier post of mine. He says:

It's perfectly possible to have significant redistribution with a tax system that is not actually progressive, as long as the rich pay higher amounts (as distinct from rates) in tax and receive less in benefits than the poor. In fact, that's pretty much what we have now.

I fear this is a glass half-full/half-empty argument. Let me clarify.

Jim is right in two senses.

First, the state does redistribute quite a bit. Table 2 of this report shows that the benefit system alone reduces the Gini coefficient from 51 per cent to 37 per cent, and raises the income share of the bottom quintile from 3 per cent to 7 per cent. Direct taxes reduce the Gini coefficient further, to 33 per cent.

Secondly, income tax is progressive. This table shows that people earning over £100,000 have a tax rate of 33.6 per cent, whilst people earning under £10,000 have a tax rate of 10.1 per cent.

However, in other senses, I’m right – big government is an obstacle to redistribution:

1. Total income tax, at £124.6bn, accounts for only 25.6 per cent of this year’s public spending (big pdf warning). Most public spending, then, is financed by other taxes. Many of these are regressive. Indirect taxes actually raise the Gini coefficient from 33 per cent back to 37 per cent. So, taking all taxes together, the tax system (as distinct from the benefit system) doesn’t redistribute.

2. People earning over £50,000 pay £53bn in income tax. That’s just 10.9 per cent of public spending. Most public spending, then, is financed by people who don’t earn very much.

3. Pure income redistribution represents only a small share of public spending. Table 3 of these figures show that benefit spending this year will be £110.4bn. Add in £14.8bn of tax credits, and we have a sum equivalent to 25.8 per cent of public spending and 10.6 per cent of GDP.

4. The biggest single chunk of benefit spending is the basic state pension, at £41.2bn, which is paid to rich and poor alike. Income-related benefits, such as income support and housing benefit, are only £34.6bn. Even adding tax credits to this gives us just 10.1 per cent of spending and 4.2 per cent of GDP.

On reflection, I think I pitched things too strongly when I said: “High government spending means the tax system cannot be used to redistribute income.” I’m grateful to Jim for correcting me on that.

But I’m sticking to my basic point, which is that there’s a trade-off between big government and redistribution. Higher government spending – in itself – is not necessarily egalitarian. Sure, the two are compatible in the sense that the government could raise both taxes and benefits, but there are many other ways in which the state grows over time.

Put it this way. We could save £8bn by abolishing the DTI and stopping UK contributions to the CAP. This would finance a 23 per cent rise in income related benefits generally, or a 160 per cent increase in income support for the over-60s, or the abolition of income tax for anyone earning less than £10,000 a year.

So, we can shrink the state and increase income equality. Both left and right are therefore wrong to believe big government and income equality go together.

Comments

[dearieme]

Redistribution is a very crude omnium-gatherum concept. In particular, I don't think it captures the different feelings that the distributed-against will often have about the purposes to which the looted money is put. If you tax me and use that money in some efficient way to provide a good education for a child from a poor home, my reaction will be very different from my reaction to your taxing me and spending the proceeds on pointless bureaucracy or,indeed, on lousy schools.

[Blimpish]

What he said - another classic is tackling pensioner poverty versus general poverty. Most people (Randians aside) are more than willing to tackle many particular social ills through redistribution, but the constituency for generalised egalitarianism is much more limited.

Anyway Chris - I'm with you all the way on the analysis. As I've doubtless said many times before, if the Left (saying this as an outsider, but a friendly one) is to have a future it must get over its fetishisation of the welfare state. All this stuff should be grounds for consensus these days - we can fight over how much and where to redistribute (vs. how much to spend on defence, etc) when we've cleared away the accumulated gunk of public 'services'.

[ivan]

Consider other examples of government increasing inequality. Take the common agricultural policy (CAP) in Europe and similar schemes in other rich countries. In at least three ways this policy of protectionism and subsidies redistributes income from the poor to the rich, thus increasing poverty:

1. Between farm households and non-farm households: average farm household incomes in rich countries are higher than average household incomes. The opposite holds in developing countries. The CAP makes farmers in devoloped countries richer than average, in poor countries it makes farmers poorer.

2. Within the group of farmers in rich countries. Most aid goes to the largest and wealthiest farmers.

3. Between farmers in rich countries and farmers in poor countries, by depressing world prices and demand for agricultural products of poor countries.

[Jim]

Thanks for responding, Chris. I think we're more in agreement now - I would say that there *can be* and frequently *is* a trade-off between big government and redistribution - though, as you say, the government *could* raise both taxes and benefits. Your example of abolishing DTI and CAP and raising benefits with the proceeds is a good example of such a trade-off, and one I'd love to see. But some people seem to see benefits in particular as the key measure of how 'big' government is, so they might not agree that government has really got smaller in that case.

[Robert Schwartz]

"Progressive" taxes and incomes policies have been in place in most European and North American countries for a century or more now. It should not be very surprising that they have had almost no impact on the distribution of wealth nor income in these societies, as there was no reason to believe that they would, if there was any ability to change the prices of labor and goods.

More draconian measures were tried in the Soviet Union with very unsatisfactory results.