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The Mirror splash on tax rates is just silly

    The Daily Mirror splash this morning, suggesting that the poor pay more in tax as a proportion of income than the rich, was one of the most misleading things I have ever read.

    Gross income, the denominator in their calculations, includes cash benefits. Indirect taxes paid includes things bought with these cash benefits. But benefits don’t appear in benefit recipient's bank accounts manna from heaven. They are a transfer, and so should be thought of as negative tax for aggregate purposes. Thus we observe that the poorest fifth of households, in actual terms, face a tax rate of -191%. That is for every £1 they *earn* in income, they get transferred another £1.91 in cash benefits and benefits in kind. This is highly, highly progressive.  But because the Mirror just assume that these benefits appear from nowhere and count towards income in the same way as earned income, which the poorest then spend, they use the 36% number to apparently show the poor pay more tax as a proportion of their income than the rich. This is utterly absurd.

    What is true is that *because* of how progressive the system is, means-testing means inevitable high marginal tax rates as these benefits are withdrawn. But this is very different from saying “it’s a scandal that the poor pay more than the rich in tax”. They don’t – precisely because a large component of their income was actually earned in the first instance by somebody else.

    Now, I’m not saying we shouldn’t redistribute anything to the poorest, the disabled, the pensioners. Far from it. But the Mirror’s splash acting as if the poorest pay more as a proportion of their incomes than the richest is really silly.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Comments

    Anonymous - About 2628 days ago

    The point you make is absolutely correct, but just as misleading as the Mirror splash. Their assertion misleads because it doesn't take account of 'negative tax', yours misleads because it assumes that all of the poor are taxed at a rate of -191%.

    In fact the rates vary enormously within the group: for anyone with no earned income the negative rate will actually be infinite! At the other extreme, working people under 25 without children might receive no benefits of any kind however low-paid their job.

    A better simple comparison for any meaningful assessment of 'all in it together-ness' might be between individuals working hard in a full-time job in the same office, one cleaning the floors for minimum wage, the other being paid millions for making disastrous loss-making strategic decisions.

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