Regressive taxes

Remember 1987? When Nigella's dad was Chancellor, when yuppies were at their peak, and when Gordon Gekko declared that "greed is good." It wasn't a good year for egalitarians, was it?
Well, here's a funny coincidence. Income equality is the same now, after years of New Labour, as it was back then.
Official figures (table 27 of this pdf) show that in 2004-05, the Gini coefficient for post-tax incomes was 36%, and the 90th percentile of people had disposable incomes 4.1 times those of the 10th percentile. Though both numbers are slightly lower than in 1996-97 (38% and 4.4), they are exactly the same as those in 1987.
One reason why New Labour hasn't increased equality much is simply that the tax system, in aggregate, is not progressive.
Yes, direct taxes reduce the Gini coefficient by 4 percentage points. But indirect taxes raise it by 4 points. So overall, taxes (as distinct from benefits) have no effect on equality.
Table 21 gives more detail. It shows that the poorest 10% of non-retired households with children had average gross incomes of £12,190 in 2004-05. Direct taxes and council taxes took £910 (7.5%) of this. The richest 10% paid 26.2% in direct taxes.
However, indirect taxes took 33.5% of the dispoable income of the poorest 10%, but only 12.8% of the incomes of the richest 10%. Tobacco duty accounted for only £348 of the £3781 paid by the bottom decile.
Of course, there's a very powerful case for high indirect taxes.
But the fact is that they are a big obstacle to greater income equality.

Comments

[Tim Hicks]

You might be interested in a working paper by Pablo Beramenda and David Rueda. There is a version at http://mpsa.indiana.edu/conf2003papers/1032122595.pdf. I believe it is in rather different shape these days, but I can't find a newer version available online.

[Robert Schwartz]

OK: Clue me in. Why should a tax system be expected to have any effect on the real economy. In an an economy where the actors have substantial freedom to set wages and prices, any change in the tax system should be countered by changes in wages and prices that will neutralize it.