Comprehensive spending review 2007
What it needs to deliver on child poverty

Reduce the disproportionate burden of taxation on poorer families

The very poorest households pay a higher proportion of their income in taxes than the richest households. This is because indirect taxes on goods - unlike income tax and national insurance - tend not to be based on ability to pay. About one-third of the poorest tenth of households with children are taxed this way by the state, more than cancelling out the progressive nature of income tax. It is not just indirect tax that is regressive: council tax costs proportionately more to the poor than to the rich. Even after council tax benefit - which rebates the cost of those eligible and who claim it - the poorest tenth paid an average of 3.8 per cent of their gross incomes on council tax; the richest tenth paid 1.4 per cent.62

Valued added tax (VAT) constitutes the largest element of the tax paid by the poorest households. VAT costs the poorest households with children about 12.7 per cent of their gross income, whereas it only costs the richest about 4.4 per cent. The next largest element paid by the poorest families is taxation levied on tobacco63 and then on petrol. For richer households, the taxes that stand out are the direct taxes on income and national insurance contributions. The 'intermediate taxes' - those paid elsewhere such as employers' national insurance contributions but which are likely to have been offset against an individual's income - also have an overall regressive effect. Tax relief is very unlikely to have as progressive impact as benefit or tax credit spending since it is of greatest benefit to those with the highest taxable income.

Some taxes, though regressive, are designed to influence consumption behaviour rather than raise money - the so-called 'sin taxes' on tobacco and alcohol or possible 'green taxes' on fuel. Whereas policy makers might not wish to change such taxes, the overall balance is wrong. Reform is needed to make the burden of taxation proportional. For example, the reliance on regressive taxes - council tax, VAT and others - could be reformed and reduced, or the gradient within existing proportional taxes (income tax and national insurance) could be sharpened. The possibility of some kind of local income tax, which would be proportional to ability to pay to replace council tax, also warrants serious attention to ensure that council tax does not work against anti-poverty policies. Many of the poorest families will, however, continue to pay proportionately more since they have to spend all of their incomes (and so are taxed upon the spending).

Addressing the tax burden is complicated, but vital to ensure we have a truly progressive taxation system that does not undermine anti-poverty policy and does not fly in the face of overwhelming public opinion - three-quarters of people in a British Social Attitudes survey believe that taxes should be proportional to the ability to pay. Greater redistribution through benefits and tax credits is required to offset the regressive effect of tax on the poorest people.

Notes

62 Analysis of Table 21 in F Jones, The Effects of Taxes and Benefits on Household Income, 2004/05, National Statistics, 2006
63 The poorest spend more on smoking than the rich in both absolute and relative terms. However, the cash difference largely disappears when the ‘sin taxes’ on tobacco and alcohol are added together.

Comprehensive spending review 2007
What it needs to deliver on child poverty

Contents page
Introduction
The Government’s record
What should the spending review deliver?
Provide most for those children at greatest risk of poverty
Work towards better jobs, not just more jobs
Ensure the safety net protects families against poverty
Maximise the contribution of child benefit within family support
Introduce free at the point of delivery good-quality childcare
Make the reduction of child poverty central to the new child support policies
Make education truly free at the point of delivery
Provide benefit entitlement to all UK residents equally, irrespective of immigration status
Reduce the disproportionate burden of taxation on poorer families
Improve the quality of delivery and gear it to the needs of the poorest families
Notes

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