The Institute for Fiscal Studies is one of the UK’s leading thinktanks on economic and financial affairs. It recently conducted a study on the impact of the government’s tax and benefits reform on the levels of inequality in the UK. The results of this study stated that the Conservatives’ changes to these areas are at an extremely high risk of increasing the level of inequality in our society.
The IFS have pointed to the clear correlation between higher levels of in-work benefits and width of the income gap in the past 70 years. It states that tax credit top-up payments and the absence of higher income tax rates were a large part of the improvement seen in that time.
This most recent revelation is thought to have added to the building levels of scrutiny that George Osborne is facing over the changes that he has made in recent budgets. The July budget brought widespread criticism due to the chancellor’s claim that the “living wage” – a higher minimum wage – would balance the adverse effects of the cuts to tax credits. The IFS immediately pointed out that the amount that people would benefit from this new “living wage” would be outweighed by the amount that people would lose out from tax credits. It estimated that there would be a total of £4bn extra income generated from the raised minimum wage but there would be around £12bn lost by the cuts to tax credits.
The thinktank went on to warn the government about the effect that its cuts would have over the course of a worker’s life.
Their research revealed that these cuts would go a long way to worsening the divide between the richest and the poorest in our society. It also went on to point out that the lower classes were often viewed as spending most of their lives in unemployment in spite of the fact that there is clear data that proves this to be incorrect. What this means is that in-work tax credits were the most effective tool for closing the inequality gap because of the way that they incentivised people to get into work. Cutting these tax credits, it said, will lower the level of pay that people receive from their employment, this means that out of work benefits will actually rise above wage levels. This results in a “poverty trap” where people do not have any incentive to try and find work because they would be better off claiming welfare payments.
One of the authors of the report, Barra Roantree, said that:
ìThe sharp distinction often made in policy debates between working and non-working families is not especially useful: in reality very few individuals are permanently out of work, the poor are not always poor and, albeit to a lesser extent, the rich are not always rich.î
He said that the government’s view, that taxing the rich for more money does not actually benefit the economy, was misplaced and higher taxation on those with the highest incomes was actually one of the best ways to prevent inequality from getting worse.
The report went on to say that even though official figures show that a third of people receive more from government benefits than they contribute in a year, only one in ten people will receive more than they contribute in their whole lifetime.
ìIn a single year, 64% of individuals in the UK pay more in taxes than they receive in social security. But most individuals experience considerable change over their lifetimes: for example those not in paid work in one year are often in work in another year,î the IFS said.
ìExtending the period of analysis from a single year to an entire lifetime increases the percentage who pay more in taxes than they receive in social security to 93%.î