The distributional effects of tax and
benefit reforms since 1997
Stuart Adam
Matthew Wakefield
Some questions to answer
• Have Labour’s reforms since 1997 taken
money from households or returned money to
them?
• Who have been the winners and losers from
the reforms?
• How does Labour’s second term compare
with its first?
“Reforms since 1997”
• Taxes and benefits only – not public services
• Estimate effects on government revenues
and household incomes in 2005-06
• Adopt Treasury ‘no change’ assumptions as
baseline
• Reforms since 1997 imply net give-away of
£1.1bn in 2005-06
Reforms since 1997
Government revenue gain in 2005-06, £bn
1997-2001 2001-2005
Income tax
NICs
Indirect taxes
Stamp duties
Corporation tax
Benefits & tax
credits
Total
– 4.8
3.7
Total
– 1.1
Reforms since 1997
Government revenue gain in 2005-06, £bn
1997-2001 2001-2005
Income tax
NICs
Indirect taxes
Stamp duties
Corporation tax
Benefits & tax
credits
Total
Total
3.2
– 2.0
6.4
2.4
– 4.8
0.9
8.7
0.1
0.3
1.5
4.1
6.7
6.6
2.7
– 3.3
–10.5
– 8.2
–18.7
– 4.8
3.7
– 1.1
Allocating payments to households
• Model effect on individual households where possible
• Data limitations mean we cannot model all reforms
• Allocate the remainder proportionately to income
• We do not model non-take-up of benefits and tax
credits
• Direction and size of resulting bias unclear
A progressive package
Distributional effect in 2005-06 of reforms since 1997
10
8
6
4
2
0
-2
-4
-6
9
8
7
6
5
4
3
2
es
t
Ri
ch
or
e
st
-8
Po
% change in net income
12
Change by parliament
Distributional effect in 2005-06 of reforms since 1997
10
1997-2001
2001-2005
8
6
4
2
0
-2
-4
-6
9
8
7
6
5
4
3
2
es
t
Ri
ch
or
e
st
-8
Po
% change in net income
12
Change by parliament
Distributional effect in 2005-06 of reforms since 1997
10
1997-2001
2001-2005
8
6
4
2
0
-2
-4
-6
9
8
7
6
5
4
3
2
es
t
Ri
ch
or
e
st
-8
Po
% change in net income
12
Change by parliament
Distributional effect in 2005-06 of reforms since 1997
10
1997-2001
2001-2005
8
6
4
2
0
-2
-4
-6
9
8
7
6
5
4
3
2
es
t
Ri
ch
or
e
st
-8
Po
% change in net income
12
Change by household type
Distributional effect in 2005-06 of reforms since 1997
0-earner couple, kids
Lone parent, working
Lone parent, not working
Single Pensioner
Couple Pensioner
1-earner couple, kids
Overall
Single, not working
0-earner couple, no kids
2-earner couple, kids
Single, working
1-earner couple, no kids
2-earner couple, no kids
-40
-30
-20
-10
10
0
£ per week
20
30
40
50
Council tax changes
• Excluded so far as not directly set by central
government
• But are affected by central government decisions
• And are tax changes that affects households
• What is ‘no change’ in council tax?
• Use inflation increases as baseline
• Actual annual rises so far average 5.2% above
inflation
• If no further change, this will raise £5.8bn in 2005-06
Adding in council tax rises
Distributional effect of reforms since 1997
12
Excluding council tax
Including council tax
% change in net income
10
8
6
4
2
0
-2
-4
-6
9
8
7
6
5
4
3
2
es
t
Ri
ch
Po
or
e
st
-8
Adding in council tax rises
Distributional effect of reforms since 1997
12
% change in net income
10
Excluding council tax
Including council tax
8
6
4
2
0
-2
-4
-6
9
8
7
6
5
4
3
2
es
t
Ri
ch
Po
or
e
st
-8
Adding in council tax rises
Distributional effect of reforms since 1997
12
Excluding council tax
Including council tax
% change in net income
10
8
6
4
2
0
-2
-4
-6
9
8
7
6
5
4
3
2
es
t
Ri
ch
Po
or
e
st
-8
Conclusions
• The overall average impact of tax and benefit
reforms since 1997 is small
• The combined set of reforms is highly
progressive
• Labour’s second term has been less
generous overall than its first, but better for
those on low incomes