Taxes aren't working

What bad news got buried yesterday? This report from National Statistics, that's what. It shows that  New Labour has failed to signficantly reduce income inequality. The Gini coefficient for post-tax income (that is, income including benefits, direct and indirect taxation) in 2003-04 was 38 per cent. That's exactly what it was in 1996-97, although it is two percentage points lower than two years ago.
However, another measure of inequality - the ratio of the disposable income of the 90th percentile to the tenth percentile - has fallen since 1996-97, from 4.4 to 4.1. Even on this measure, though, inequality is as high now as it was in 1987, the high-point of Thatcherism.
The report confirms that the tax system - as distinct from the benefits system - is slightly regressive. Naturally, benefits increase equality. They cut the Gini coefficient from 52 per cent to 37 per cent and raise the share of the bottom quintile from 3 per cent to 7 per cent.
However, taxes do not increase equality beyond this. Yes, direct taxes cut the Gini coefficient another three percentage points, to 34 per cent. But this is more than offset by indirect taxes, which raise the Gini coefficient back to 38 per cent.
The distribution of income after all taxes looks very similar to the distribution before taxes but after benefits.
The reason for this is simple. Indirect taxes are hugely regressive. The bottom quintile spends 31 per cent of its income on indirect taxes, whilst the top quintile spends only 19 per cent.
I take two lessons from this. First - and surprisingly - increased employment seems not to have depressed inequality much.
Second, if  you want to increase equality, you've got to either shift taxes from indirect taxes to direct ones  or you've got to increase benefits.  Both these routes might be inefficient in several ways. But both are quite consistent with cutting government spending on non-benefit items.

Comments

[dearieme]

Put otherwise, it should be pretty easy to cut both taxes and benefits in a way that does not increase inequality, but that does realise the benfits that should flow from such cuts.

[dearieme]

Twit! Please read as "but that does realise the advantages that should flow from such cuts."

[Phil Hunt]

"The bottom quintile spends 31 per cent of its income on indirect taxes, whilst the top quintile spends only 19 per cent."

Is this due to the taxes on booze and fags?

[chris]

It's only partly due to booze and fags, Phil. The poorest quintile spend 5.3% of thie disposable income on these, against 2.4% for the top quintile. There are also big differences in VAT (11.8% of poor incomes against 8% of high incomes) and "other" duties (mostly insurance and gambling I guess), which are 10.7% and 6.2% of incomes.