Proof that our tax system does help fight inequality

Economists find it ‘significantly’ cuts gap between top and lowest earners

THE UK tax system does reduce inequality and help redistribute wealth from the rich to the poor, leading economists have found.

Before tax, the top 20 per cent of earners get 12 times as much each as the bottom fifth.

But after heavy taxes on the wealthy – and benefits for those struggling to get by – the top 20 per cent are only five times better off, the Institute for Fiscal Studies said.

The figures will be seen as a rebuke to Left-wing campaigners who claim the system is rigged in favour of the ultra-rich. Pascale Bourquin, of the IFS, said: ‘The tax and benefit system significantly reduces the gap between rich and poor, with benefits playing a particularly big role.’

Looking at childless couples, the bottom- earning fifth typically had an income of £7,700 per year before tax, according to the IFS report released today.

By comparison the top 20 per cent of childless couples were on an average of £95,560 each – 12 times as much. But after taxes were taken away and benefits added on, the gap narrowed significantly.

When these impacts were factored in, it increased the average earnings for the worst- off fifth to £12,460. Meanwhile, the best-paid were so heavily taxed that their average earnings came down to £64,050 – just over five times as much.

Income tax is particularly important in redistributing wealth, because the highest earners pay rates of 40 per cent or 45 per cent on much of their income, while the lowest pay only 20 per cent, or nothing at all if they are on £12,500 a year or less. But the IFS criticised council tax, which is a fixed cost that does not depend on how much someone is earning.

This means those on low incomes pay as much as those on high ones. The think-tank said council tax swallowed up eight per cent of income for the poorest households, but no more than two per cent for the richest ones.

IFS experts also said that benefits play a more important part in levelling the playing field than taxes.

Benefits make up 54 per cent of income for the poorest fifth, whereas they account for only three per cent of what top earners take home.

The findings contradict claims by campaigners that the tax and benefits system favours the wealthy.

At Prime Minister’s Questions earlier this month, Labour leader Jeremy Corbyn said: ‘This country is seeing the rich get richer while the poor get poorer, while the Government is in the pockets of a super-rich elite.

‘More children in poverty. More pensioners in poverty. More people struggling to make ends meet.

‘When is the Government going to reverse the tax giveaway to the super rich and end the scandal of inequality in modern Britain?’

The party has championed higher taxes on the rich.

It has proposed a 45 per cent tax rate on incomes above £80,000, down from the £150,000 where this rate starts at present. And workers who are paid more than £123,000 could be hit with a 50 per cent rate under Labour.

Britain brought in £525billion of revenue from taxes on the public in 2016-17, and handed out £217billion in benefits spending.

‘Benefits play a particularly big role’