According to a report released by the Institute for Fiscal Studies, the UK tax system does help reduce the country’s wealth inequality problem, however, tax benefits still do most of the heavy lifting in redistributing wealth from rich to poor. The findings were seized on by the shadow chancellor, John McDonnell, who said the IFS’s evidence showed that the government was wrong to plan tax cuts. Funded by the government-backed Economic and Social Research Council, the IFS analysis contradicts the report published last year by Office for National Statistics, which found that the tax system has a “negligible effect on income inequality”.
The report stated that the system of direct taxes (income tax, NICs and council tax) and benefits reduces inequality. Pascale Bourquin, a research economist at IFS said: “The tax and benefit system significantly reduces the gap between rich and poor, with benefits playing a particularly big role. However, contrary to the ONS’s claim, taxes do also reduce inequality.
“But the bigger picture is that what matters for income inequality is the progressivity of the tax and benefit system as a whole, and not a specific part of it. The government should achieve its desired amount of redistribution using those parts of the tax and benefit system best suited to that particular job.” he added
McDonnell said: “The IFS has confirmed the importance of taxation and social security in creating a fairer society. We all benefit at different times of our lives from the system we pay into, but many are being pushed into poverty by low pay, sharply rising rents and brutal cuts to social security.
“With tax cuts already featuring in the Conservative leadership election campaign, it’s clear only Labour is serious about addressing the problems created by nine years of austerity.”
The IFS found that benefits are still by far the biggest tool for reducing inequality. The poorest fifth of society receive 16 times more in benefits as a share of their net income than the highest-income fifth does. But the highest-income fifth pays just 2.7 times as much direct tax as a share of income as the poorest fifth.
