Distributional analysis of tax and benefit
changes
James Browne
© Institute for Fiscal Studies
Distributional impact of tax and benefit changes:
the HMT view
• HMT: yesterday’s welfare changes were regressive, but overall
package of tax and benefit changes by 2012–13 is progressive
• HMT assessment cannot tell us about the overall distributional
impact. It:
– includes only measures ‘where there is sufficiently robust data
available to attribute changes in tax, tax credits or benefits to
individuals’
– this ignores a third of the changes due to take place by 2012-13
– includes only measures to be introduced by 2012–13 because
Government ‘will take a view on tax and welfare policy [affecting
2014-15] based on the emerging fiscal position in future fiscal
events’; also behavioural responses important in medium-run
– so looks at a year in which the welfare savings are just £7.3bn, not
£18bn
© Institute for Fiscal Studies
Distributional impact of tax and benefit changes:
can we do better?
• HMT omit impact of following reforms
– Housing Benefit
– Employment and Support Allowance
– Disability Living Allowance
– the way in which in-year income changes affect tax credit awards
– Council Tax Benefit
• These are all likely to affect poorest half more than richest half
• We think we can roughly estimate the likely distributional impact
• Means our estimates will be more complete, but less precise
• Throughout we assume that there is no behavioural response,
and that reforms do not change pre-tax prices in the economy
– More plausible in some cases than others (e.g. VAT, Housing
Benefit)
© Institute for Fiscal Studies
Distributional impact of welfare measures announced in the
Spending Review to be in place by 2012–13
0.0%
Change in net Income
-0.2%
-0.4%
-0.6%
-0.8%
IFS
HMT
-1.0%
-1.2%
-1.4%
Poorest
2
3
4
5
6
Income Decile Group
© Institute for Fiscal Studies
7
8
9
Richest
Distributional impact of welfare measures announced in the
Spending Review to be in place by 2014–15
0.0%
Change in net Income
-0.2%
-0.4%
-0.6%
-0.8%
-1.0%
-1.2%
Assumes councils means-test CTB
more aggressively
-1.4%
Poorest
2
3
4
5
6
Income Decile Group
© Institute for Fiscal Studies
7
8
9
Richest
Distributional impact of SR welfare cuts
• Welfare cuts announced yesterday are regressive according to
both our and HMT’s analysis
– Less regressive once impact of Child Benefit cut fully in place
– Remaining omission is impact of Universal Credit
• What about overall impact of tax and benefit changes to be
introduced over the next few years?
© Institute for Fiscal Studies
Distributional impact of tax and benefit
measures to be in place by 2012–13
Change in net Income
£0
0%
-£500
-1%
-£1,000
-2%
-£1,500
-3%
-£2,000
-4%
-£2,500
-5%
-£3,000
-6%
-£3,500
-7%
-£4,000
-8%
Poorest
© Institute for Fiscal Studies
2
3
4
5
6
7
8
Income Decile Group
Announced by previous government
June Budget
CSR
Total as a % of income (right axis)
Total as a % of expenditure (right axis)
HMT total as a % of income (right axis)
9
Richest
Distributional impact of tax and benefit
measures to be in place by 2014–15
Change in net Income
£0
0%
-£500
-1%
-£1,000
-2%
-£1,500
-3%
-£2,000
-4%
-£2,500
-5%
-£3,000
-6%
-£3,500
-7%
-£4,000
-8%
Poorest
© Institute for Fiscal Studies
2
3
4
5
6
7
8
Income Decile Group
Announced by previous government
June Budget
CSR
Total as a % of income (right axis)
Total as a % of expenditure (right axis)
9
Richest
Distributional impact of tax and benefit
measures to be in place by 2014–15
Change in net Income
£0
0.0%
-£500
-1.5%
-£1,000
-3.0%
-£1,500
-4.5%
-£2,000
-6.0%
-£2,500
-7.5%
-£3,000
-9.0%
Lowest
© Institute for Fiscal Studies
2
3
4
5
6
7
8
Expenditure Decile Group
Announced by previous government
June Budget
CSR
Total as a % of income (right axis)
Total as a % of expenditure (right axis)
9
Highest
Distributional impact of tax and benefit
measures to be in place by 2014–15: by family
type
0%
Change in net Income
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
Poorest
2
3
4
5
6
7
8
Income Decile Group
Families with children
© Institute for Fiscal Studies
Pensioners
Others
9
Richest
Conclusions
• Welfare cuts announced yesterday are regressive, less so once
child benefit cut fully in place
• Overall, richest tenth lose most, but because of Labour’s tax
rises
• HMT say that package of tax and benefit reforms to be
introduced by 2012-13 is progressive (apart from bottom income
decile)
• We disagree. Having considered all welfare cuts:
• Reforms by 2012–13 are slightly regressive or flat within bottom
nine-tenths of households
• Reforms by 2014–15 are more clearly regressive within bottom 90%
• The regressive impact is the result of reforms announced by the
current Government both in the June Budget and in SR
• Families with children the biggest losers
•
HMT said that reforms will not increase relative child poverty over
© Institute for Fiscal Studies
next two years. Maybe, but what about future years?