The tax & benefit system from a lifetime
perspective
Barra Roantree
© Institute for Fiscal Studies
Key aim of tax & benefit system is redistribution
Net transfers from state by income decile: 2013-14 system
£200
£100
£ per week
£0
-£100
-£200
-£300
-£400
-£500
-£600
-£700
-£800
Poorest
2
3
4
5
6
7
8
9
Richest
Income decile group
Notes: see Figure 9.1 in IFS Green Budget 2013, Chapter 9.
Source: Authors’ calculations using the IFS tax and benefit microsimulation model, TAXBEN, to apply the 2013–14 tax and
©benefit
Institute for
Fiscal to
Studies
system
uprated data from the 2010 Living Costs and Food Survey.
All
0
.1
Gini coefficient
.2
.3
.4
.5
… which significantly reduces income inequality
Gross income
Net income
Notes: see Table 3.1 in ‘Redistribution from a Lifetime Perspective’. Both bars show cross-section
© Institute for Fiscal Studies
But this is just at a snapshot in time:
People see significant change in their circumstances over their lifetime
State
Average at point in time
Ever over 18-waves
In a couple
Married
Has child aged 18 or under
Disabled
Unemployed
Source: Table 2.2 from http://www.ifs.org.uk/publications/7130
Note: Authors’ calculations based on BHPS data. Includes all non-dependants aged 16+. The ‘average across waves’ column includes all
waves and is weighted using cross-sectional weights. The ‘ever observed’ columns are calculated for individuals observed in all waves
from wave 1 to the destination wave and weighted using longitudinal weights. The final two lines (earnings quintiles) only include
individuals who are employed in all relevant waves.
© Institute for Fiscal Studies
But this is just at a snapshot in time:
People see significant change in their circumstances over their lifetime
State
Average at point in time
In a couple
64.4%
Married
56.0%
Has child aged 18 or under
28.1%
Disabled
7.7%
Unemployed
4.7%
Ever over 18-waves
Source: Table 2.2 from http://www.ifs.org.uk/publications/7130
Note: Authors’ calculations based on BHPS data. Includes all non-dependants aged 16+. The ‘average across waves’ column includes all
waves and is weighted using cross-sectional weights. The ‘ever observed’ columns are calculated for individuals observed in all waves
from wave 1 to the destination wave and weighted using longitudinal weights. The final two lines (earnings quintiles) only include
individuals who are employed in all relevant waves.
© Institute for Fiscal Studies
But this is just at a snapshot in time:
People see significant change in their circumstances over their lifetime
State
Average at point in time
Ever over 18-waves
In a couple
64.4%
87.2%
Married
56.0%
80.7%
Has child aged 18 or under
28.1%
52.3%
Disabled
7.7%
26.8%
Unemployed
4.7%
23.9%
Source: Table 2.2 from http://www.ifs.org.uk/publications/7130
Note: Authors’ calculations based on BHPS data. Includes all non-dependants aged 16+. The ‘average across waves’ column includes all
waves and is weighted using cross-sectional weights. The ‘ever observed’ columns are calculated for individuals observed in all waves
from wave 1 to the destination wave and weighted using longitudinal weights. The final two lines (earnings quintiles) only include
individuals who are employed in all relevant waves.
© Institute for Fiscal Studies
But this is just at a snapshot in time:
Labour market activity and unemployment display strong age profiles
Unemployment rate
.15
.1
0
0
.05
.2
.4
Activity rate
.6
Unemployment rate
.2
.8
.25
1
Labour market activity rate
20
30
40
Age
50
60
70
Male
20
30
40
Age
50
60
70
Female
Source: Figure 2.1 from http://www.ifs.org.uk/publications/7130
Note: Authors’ calculations based on pooled data from all 18 waves of the BHPS. Includes all non-dependants aged 16–70. Results are
weighted using cross-sectional weights. Employment and unemployment calculated according to International Labour Organisation (ILO)
definitions. Labour market activity defined as being employed or unemployed.
© Institute for Fiscal Studies
But this is just at a snapshot in time:
… as do earnings (especially for women)
0
200
400
600
Median gross earnings of employees by age & sex
20
30
40
50
60
70
Age
Male
Female
Source: Figure 2.2 from http://www.ifs.org.uk/publications/7130
Note: Authors’ calculations based on pooled data from all 18 waves of the BHPS. Includes all employed non-dependants
aged 16–70. Results are weighted using cross-sectional weights. Gross earnings are before taxes and benefits and are
uprated to December 2012 prices.
© Institute for Fiscal Studies
All suggests should take lifetime perspective
• May change our assessment of:
– Income inequality & the role of the tax and benefit system
– The progressivity of historic and proposed tax and benefit reforms
– How policy should be designed
• But data limitations mean most analysis of the tax & benefit
system is based on information at a snapshot in time
– Researchers at IFS simulated the lifetimes of the baby-boom cohort
(1945-54) in order to address some of these questions
– Used British Household Panel Survey (BHPS) used to model transitions
between consecutive years and Living Costs and Food Survey (LCFS)
used to adjust simulations to match cross-sectional distributions
– Include most personal taxes and benefits, assuming full take-up;
exclude benefits of public service spending
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From a lifetime perspective…
.4
.5
The tax & benefit system does less to reduce inequality between people
0
.1
Gini coefficient
.2
.3
31% fall
Cross-section
Gross income
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Lifetime
Net income
From a lifetime perspective…
.4
.5
The tax & benefit system does less to reduce inequality between people
Gini coefficient
.2
.3
31% fall
0
.1
15% fall
Cross-section
Gross income
© Institute for Fiscal Studies
Lifetime
Net income
From a lifetime perspective…
… as more of what it does is intrapersonal redistribution
Poorest
Lifetime net income decile
2
3
4
5
6
7
8
9
Richest
57%
All
0
.2
.4
.6
.8
Share of redistribution that is intrapersonal
Notes: see Figure 3.7 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
1
From a lifetime perspective…
… as more of what it does is intrapersonal redistribution
Poorest
Lifetime net income decile
2
3
4
5
6
7
8
9
Richest
All
0
.2
.4
.6
.8
Share of redistribution that is intrapersonal
Notes: see Figure 3.7 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
1
.2
Gini coefficient
.25
.3
.35
How have 40 years of reforms affected inequality?
1980/81
1990/91
2000/01
2010/11
Tax system
Cross-section
Notes: see Figure 4.1 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
Lifetime
2020/21
.2
Gini coefficient
.25
.3
.35
How have 40 years of reforms affected inequality?
1980/81
1990/91
2000/01
2010/11
Tax system
Cross-section
Notes: see Figure 4.1 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
Lifetime
2020/21
.2
Gini coefficient
.25
.3
.35
How have 40 years of reforms affected inequality?
1980/81
1990/91
2000/01
2010/11
Tax system
Cross-section
Notes: see Figure 4.1 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
Lifetime
2020/21
What were the distributional consequences of …
The 4-year benefit freeze announced in the July 2015 Budget
Percentage change in net income
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
Poorest
2
3
4
5
6
7
Net income decile
Cross-section
Notes: see Figure 4.4 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
Lifetime
8
9
Richest
All
Proportional change in Gini coefficient
What are the most cost-effective policies to reduce
cross-sectional inequality directly?
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
Note: Income Support category includes means-tested Jobseekers Allowance and Employment Support Allowance
© Institute for Fiscal Studies
Proportional change in Gini coefficient
What are the most cost-effective policies to reduce
lifetime inequality directly?
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
Note: Income Support category includes means-tested Jobseekers Allowance and Employment Support Allowance
© Institute for Fiscal Studies
Out-of-work benefits help snapshot poor most
Percentage change in net income
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Poorest
2
3
4
5
6
7
8
9
Net income decile
Out-of-work benefits
In-work benefits
Notes: see Figure 5.3 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
Personal Allowance
Richest
All
… but in-work benefits help lifetime poor as much
1.0%
Percentage change in net income
0.9%
0.8%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%
Poorest
2
3
4
5
6
7
8
9
Net income decile
Out-of-work benefits
In-work benefits
Notes: see Figure 5.4 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
Personal Allowance
Richest
All
Higher-rate of income tax targets lifetime rich well
Percentage change in net income
0.0%
-0.1%
-0.2%
-0.3%
-0.4%
-0.5%
Poorest
2
3
4
5
6
7
Net income decile
Cross-section
Notes: see Figure 5.5 in ‘Redistribution from a Lifetime Perspective’
© Institute for Fiscal Studies
Lifetime
8
9
Richest
All
What are the implications for the design of policy?
1. Policymakers need to be clear about their objectives: trying to
alleviate short-run hardship or redistribute lifetime resources?
2. “Working” and “non-working” families is not a useful distinction
3. Policymakers looking to reduce inequality or transfer resources to
the lifetime poor might favour doing so through in-work benefits
4. The potential exists to achieve what the current tax and benefit
system does more efficiently
© Institute for Fiscal Studies
Redistribution from a lifetime perspective:
historical and hypothetical reforms
Peter Levell, Barra Roantree and Jonathan Shaw
© Institute for Fiscal Studies