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The UK is one of the most unequal countries in Europe when looking at before tax income. The redistributive effect of the benefits system brings the UK up to the European average of income inequality. This is no small change. Before the tax and benefits system redistributes the richest 10% has 24 times the income of the bottom 10%. After the system redistributes, the top 10% have just 9 times more. This reduction is largely brought about by increasing the incomes of the poorest in society.
How do tax and benefits achieve this?
The UK has a progressive income tax system, it taxes higher earrings at a larger percentage. This goes a small way to reduce income inequality by taking more from those who have more. Other taxes counteract this. Flat rate tax, like VAT, is the same for everyone therefore the poor pay a higher percentage of their income as a result. If someone earns £100 pounds a week and spends £20 of it, £2 of that 20 will be VAT. They have effectively been taxed at 2% of their income. While if someone earns £1000 a week and spends £20, £2 of which is VAT. They have been taxed at 0.2% of their income. Flat tax is regressive, it makes inequality worse. In the UK the effects of these two types of taxation balance each other out. It is the benefits system that decreases income inequality. It does this by bring up the income of the poorest 10% from £4,436 to £9,644.
So what’s the problem?
Benefits paid to working age men and women are set to reduce by 37 billion between 2010 and 2021. Many of these cuts have already taken effect and have contributed to the year on year rise in demand for food banks. The Trussell Trust handed out 1,332,952 three day emergency food supplies to those in need in 2018. The benefits people receive, which mostly top up paid incomes, help them stay afloat. Any reduction may push them over into destitution and force them to seek help from organisations like the Trussell Trust.
What should be done?
For individuals, benefits provided by the state are essential. They help keep households going by topping up the wages, giving support to those that can’t work and helping to insulate against the financial cost of unfortunate events. On the macro scale they are effective at reducing income inequality dramatically. This is a system that provides a social good. If government is serious about poverty reduction and reducing inequality in general, the UK benefit system should be bolstered not cut.