THE BLOG

Welfare Myth Three - The Poor Don't Pay Taxes

11/04/2013 17:38 BST | Updated 11/06/2013 10:12 BST

Iain Duncan Smith thinks he can live on £53 per week, but does he know how much of this he will have to pay in taxes? This blog explores the myth that the poor don't pay tax.

A common rhetorical trick for politicians is to talk about 'looking after the tax payer'. However the reality is that they are often only really concerned with particular tax payers - the electoral groups that determine the outcomes of elections - often people on middle-incomes. They talk as if tax payers are some hard-pressed group who are burdened by the poor and that the rest of us don't pay taxes.

But the reality is that there are many different taxes (the Institute of Fiscal Studies counted at least 25). Also the poorest people don't just pay tax, they often pay the most tax. But, as our incomes change, so do the different kinds of taxes we pay.

One useful source of data is the Office of National Statistics who calculate all the taxes that we pay and all the benefits we receive. The latest statistics (for 2010 to 2011) allow us to compare the different taxes paid by different groups.

The two pie charts below compare the taxes paid by the poorest 10% of families and the richest 10% of families. It is very clear that, for the poorest, the most biggest taxes are VAT, council tax and income tax. For the richest 10% it is Income tax that is by far and away the biggest tax.

2013-04-10-399DifferentTaxes20101101.jpg

So, it's absolutely clear that the poor do pay taxes. Not just indirect taxes, like VAT, but also income tax and council tax. Many other taxes are hidden from view in duties or other background taxes like Employer's National Insurance. This is why it's very important to pay attention to the detail of what Chancellors say in their budgets.

Despite this you might naturally suppose that the rich must pay a much higher rate of tax than the poor. After all the income tax system is meant to place progressively higher burdens on people with higher incomes. However, when you look at the rates of tax paid by each household you discover something very surprising.

The highest rate of tax, that is the share of income lost in tax, is paid by the poorest 10% of households (or families). The poorest 10% of families pay 45% of their income in tax. The other 90% of families pay quite a similar rates of tax, varying between 31% and 35%. You can see this in the chart below. As your income increases you naturally pay a bigger amount of tax - but the rate (the percentage) of tax hardly changes.

2013-04-10-398TaxRates20101101.jpg

Curiously this all means that, except for the very poor, the UK has what is called a 'flat tax system' - everybody pays the same rate of tax as each other. But this flat tax system is achieved by combining a progressive income tax system with a system of very high indirect or hidden taxes - what are called 'regressive' taxes that target the poorest.

Arguably this even understates the problem. If you have a disability or are becoming frail in old age, and therefore need social care, you will find yourself subject to a further vicious tax - called social care charging - a tax that only targets disabled people. People on benefits are also subject to other vicious taxes hidden within the 'benefit reduction rates'. But I'll explore these problems some other time.

The three things to remember when politicians talk about tax:

1. Tax payers are not a special class of people - we are all tax payers

2. Tax payers are not burdened by the poor - the poor are super tax payers

3. Tax cuts come in many different shapes and sizes - not everybody benefits equally

So, if Iain Duncan Smith (and his family) does choose to live on £53 per week, then perhaps he will be more sensitive to the fact that much of this money will be handed straight back to the government.

If you want to find out more about the paradoxes of our tax-benefit system you might want to read A Fair Income which is published by The Centre for Welfare Reform and the University of Birmingham.