Poorer people have bigger tax burden than the rich

Filed under: Tax

If anyone is still clinging to the belief that we're all in anything together, they should prepare for some bad news, because according to the Office for National Statistics, the poor are shouldering more than their fair share of the tax burden. Apparently they pay out 37% of everything they earn in taxes, compared to the rich who pay out 35%.

So how can this happen, and is it fair?

Tax

The ONS has been crunching the numbers to assess the effect of tax and benefits on all of us. It found that the average household has an annual income of £37,456. It spends £7,428 of it on direct taxes, such as income tax and council tax, and £5,518 in indirect tax, leaving it with £24,509 to make ends meet. This is down £1,200 since the start of the economic downturn.

Of course the average hides the extremes, so it's worth noting that the richest 20% of people have an average income of £78,300 a year, while the poorest fifth have an average income of £5,400. Surprisingly this gap is actually smaller than in the previous year, because the rich are making marginally less money.

When you just look at the direct taxes, things look straightforward, with the rich shouldering the bulk of the burden, and the poor paying a smaller proportion of their income in tax. The average household pays around 20% of their income in direct tax. The richest fifth pay £19,900 a year - which is 25% of their income. The poorest fifth pay £1,300 a year which is 10% of their income.

Unfair?

It's when it comes to indirect taxes - like VAT and duty on alcohol and fuel - that things go awry. The rich still pay more of this - £8,700 a year compared to £3,400 a year. However, the poorest fifth spend 29% of their income on these taxes, while the rich spend just 14%.

These gap between these proportions has actually increased over the last two years largely because VAT increased. It means that while we have been hearing so much about fairness, and the cutting of taxes for the worst-off, the tax burden for this group has actually been growing.

On the flip side, the worse-off do receive some of this back in benefits. The poorest receive £7,400 in benefits, while the second poorest fifth receive £8,400 (which includes a lot of pensioners receiving state pensions).

The ONS also takes into account what it calls 'benefits in kind'. These are things like schools and healthcare, which we receive a value from even though we don't receive any actual cash. They calculate that the poorest fifth receive £7,700 worth of services, while the richest receive £5,200.

So is this fair?

 

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