Redistribution of Income (in Great Britain/explained by Lorenz Curves)

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Redistribution of Income (in Great Britain/explained by Lorenz Curves) The Government can redistribute from the rich to the poor by progressive taxes or by regressive benefits. Taxes are progressive if they rise more than proportionately with higher s. They can be either direct (as taxes) or indirect (as VAT). Benefits are regressive if people with lower s get more benefits (in proportion to their ) than those with higher s. They can be in cash (as pensions) or in kind (as education services). The Office for National Statistices is using the following scheme 1 : Original + Cash benefits = Gross - Direct taxes and Employees' NIC and Local taxes = Disposable - Indirect taxes = Post-tax + Benefits in kind = Final 1 Office for National Statistics: The Effects of Taxes and Benefits on Household Income, 2010/2011 - Further Analysis and Methodology REDINCOM.DOC page 1 (of 3 + 5 app.) 08.03.2016

or the same scheme graphically: Stages of redistribution BENEFITS Original TAXES Cash benefits Gross Direct taxes (+) Disposable Indirect taxes Post-tax Benefits in kind Final REDINCOM.DOC page 2 (of 3 + 5 app.) 08.03.2016

Does redistribution happen? 1 Redistribution by direct taxes (from gross to disposable )? The Lorenz Curve (initially for gross ) moves towards the 45o-diagonal line (finally for disposable ). Thus, according to appendix 1, direct taxes are progressive. 2 Redistribution by indirect taxes (from disposable to post-tax )? Appendix 2 shows that the Lorenz Curve moves outwards. This means that indirect taxes are regressive. 3 Redistribution by all taxes (from gross to post-tax )? It is very difficult to see two different Lorenz Curves in appendix 3. This means that the tax system (direct and indirect taxes) does not change distribution. The tax system as a whole is therefore (practically) proportional. This means that on average the same amount of taxes per unit of has to be paid, irrespective of the level of. 4 Redistribution by taxes and benefits (from original to final )? If (as in appendix 4) we compare the Lorenz Curve for the original with that for the final, we get the overall redistribution due to taxes and to benefits. Because taxes are almost proportional, the inward shift of the Lorenz Curve can be nearly completely attributed to benefits. Benefits are regressive. It can be concluded that redistribution of in Great Britain occurs because of the benefits, and not because of the taxes. REDINCOM.DOC page 3 (of 3 + 5 app.) 08.03.2016

Lorenz Curves GB 2013/14 Appendix 1 Redistribution by direct taxes Gross Disposable Zehntel Haushalte in 000 % Gross % Disposable % 1 2664 10 9524 2.4 8468 2.7 2 2670 10 16307 4.2 14857 4.7 3 2661 10 20341 5.2 18342 5.8 4 2674 10 23947 6.1 21055 6.6 5 2666 10 28957 7.4 24826 7.8 6 2667 10 34277 8.7 28544 9.0 7 2669 10 41123 10.5 33545 10.6 8 2645 10 50026 12.8 40110 12.6 9 2689 10 62721 16.0 49066 15.4 10 2670 10 104779 26.7 79042 24.9 Sum 26675 100 392002 100.0 317855 100.0 = Average in Gross Disposable 10 2.4 2.7 20 6.6 7.3 30 11.8 13.1 40 17.9 19.7 50 25.3 27.5 60 34.0 36.5 70 44.5 47.1 80 57.3 59.7 90 73.3 75.1 100 100.0 100.0 Lorenz Curves GB 2013/14 Gross 100 Disposable 90 80 Income 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Source: Office for National Statistics: The effect of taxes and benefits on household, 2013/14 (Table 14) APPEND01.XLS 08.03.2016

Lorenz Curves GB 2013/14 Appendix 2 Redistribution by indirect taxes Disposable Post-tax Deciles in 000 % Disposable % Post-tax % 1 2664 10 8468 2.7 5234 2.0 2 2670 10 14857 4.7 10826 4.2 3 2661 10 18342 5.8 14275 5.5 4 2674 10 21055 6.6 16647 6.5 5 2666 10 24826 7.8 19607 7.6 6 2667 10 28544 9.0 22539 8.7 7 2669 10 33545 10.6 27176 10.5 8 2645 10 40110 12.6 32537 12.6 9 2689 10 49066 15.4 40615 15.7 10 2670 10 79042 24.9 68532 26.6 Sum 26675 100 317855 100.0 257988 100.0 = Average in Disposable Post-tax 10 2.7 2.0 20 7.3 6.2 30 13.1 11.8 40 19.7 18.2 50 27.5 25.8 60 36.5 34.5 70 47.1 45.1 80 59.7 57.7 90 75.1 73.4 100 100.0 100.0 Lorenz Curves GB 2013/14 100 90 80 Disposable Post-tax Income 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Source: Office for National Statistics: The effect of taxes and benefits on household, 2013/14 (Table 14) APPEND02.XLS 08.03.2016

Lorenz Curves GB 2013/14 Appendix 3 Redistribution by direct and indirect taxes Gross Post-tax Deciles in 000 % Gross % Post-tax % 1 2664 10 9524 2.4 5234 2.0 2 2670 10 16307 4.2 10826 4.2 3 2661 10 20341 5.2 14275 5.5 4 2674 10 23947 6.1 16647 6.5 5 2666 10 28957 7.4 19607 7.6 6 2667 10 34277 8.7 22539 8.7 7 2669 10 41123 10.5 27176 10.5 8 2645 10 50026 12.8 32537 12.6 9 2689 10 62721 16.0 40615 15.7 10 2670 10 104779 26.7 68532 26.6 Sum 26675 100 392002 100.0 257988 100.0 = average in Gross Post-tax 10 2.4 2.0 20 6.6 6.2 30 11.8 11.8 40 17.9 18.2 50 25.3 25.8 60 34.0 34.5 70 44.5 45.1 80 57.3 57.7 90 73.3 73.4 100 100.0 100.0 Lorenz Curves GB 2013/14 100 90 80 Gross Post-tax Income 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Source: Office for National Statistics: The effect of taxes and benefits on household, 2013/14 (Table 14) APPEND03.XLS 08.03.2016

Lorenz Curves GB 2013/14 Appendix 4 Redistribution by taxes and benefits Original Final Deciles in 000 % Original % Final % 1 2664 10 3738 1.1 12050 3.7 2 2670 10 7304 2.2 18958 5.8 3 2661 10 11411 3.4 22450 6.9 4 2674 10 16051 4.8 23895 7.3 5 2666 10 21609 6.5 27230 8.3 6 2667 10 28074 8.5 29486 9.0 7 2669 10 36105 10.9 33700 10.3 8 2645 10 45654 13.8 39102 12.0 9 2689 10 59239 17.9 46372 14.2 10 2670 10 102366 30.9 73682 22.5 Sum 26675 100 331551 100.0 326925 100.0 = average in Original Final 10 1.1 3.7 20 3.3 9.5 30 6.8 16.4 40 11.6 23.7 50 18.1 32.0 60 26.6 41.0 70 37.5 51.3 80 51.3 63.3 90 69.1 77.5 100 100.0 100.0 Lorenz Curves GB 2013/14 100 90 80 Original Final Income 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Source: Office for National Statistics: The effect of taxes and benefits on household, 2013/14 (Table 14) APPEND04.XLS 08.03.2016

Appendix 5: TABLE 27: Gini coefficients for the distribution of at each stage of the tax-benefit system and P90/P10 and P75/P25 1 ratios for disposable for all households, 1977 to 2013/14 2 Gini coefficients (per cent) Ratios for disposable Equivalised 3 Original Gross Disposable Post-tax P90/P10 P75/P25 1977 42.9 30.0 27.2 29.4 3.4 2.0 1978 42.9 29.8 26.6 28.1 3.3 2.0 1979 43.6 30.1 27.4 29.1 3.4 2.1 1980 44.5 31.2 28.6 30.9 3.6 2.1 1981 45.9 31.8 29.0 31.4 3.5 2.1 1982 47.0 31.5 28.6 31.3 3.4 2.0 1983 48.5 32.7 29.4 32.2 3.6 2.1 1984 48.6 31.7 28.4 30.8 3.5 2.1 1985 49.5 33.6 30.4 33.3 3.8 2.2 1986 50.5 34.5 31.6 35.3 3.8 2.2 1987 51.1 36.1 33.2 36.7 4.2 2.3 1988 50.9 37.1 35.1 38.8 4.6 2.5 1989 49.7 36.3 34.4 37.8 4.7 2.5 1990 51.4 38.6 36.8 40.6 5.0 2.7 1991 51.2 37.8 35.6 39.4 5.0 2.6 1992 51.7 37.3 34.7 38.4 4.7 2.5 1993 53.3 37.8 34.8 38.7 4.6 2.4 1994/95 52.8 37.0 33.8 37.4 4.4 2.3 1995/96 52.0 36.5 33.0 36.9 4.3 2.3 1996/97 52.6 37.6 34.4 38.2 4.5 2.4 1997/98 52.6 37.8 34.5 38.3 4.6 2.4 1998/99 52.7 38.6 35.4 39.3 4.7 2.4 1999/00 52.5 38.7 35.8 40.0 4.7 2.4 2000/01 51.3 37.9 35.0 39.2 4.7 2.4 2001/02 52.6 39.3 36.2 40.6 4.8 2.4 2002/03 51.1 37.4 33.8 37.7 4.4 2.3 2003/04 51.7 37.7 34.0 38.1 4.2 2.2 2004/05 50.7 36.6 32.8 36.5 4.2 2.1 2005/06 51.8 37.6 33.9 37.5 4.4 2.2 2006/07 51.5 38.2 34.7 38.7 4.5 2.3 2007/08 51.6 37.7 34.2 38.0 4.6 2.2 2008/09 52.1 37.8 34.3 37.7 4.4 2.2 2009/10 52.0 37.0 33.2 36.8 4.2 2.1 2010/11 52.2 37.1 33.7 37.6 4.2 2.1 2011/12 51.7 36.3 32.3 36.3 4.0 2.1 2012/13 52.2 37.1 33.3 37.2 4.1 2.1 2013/14 50.3 36.0 32.4 36.3 4.2 2.1 Notes: Source: Office for National Statistics 1 P90/P10 is the ratio of the at the 90th percentile to the 10th; P75/P25 is the ratio of the at the 75th percentile to the 25th. 2 From 1990 this includes company car benefit and beneficial house purchase loans from employers. From 1996-97 values are based on estimates for the sample grossed to population totals. 3 Ranked by equivalised disposable, using the modified-oecd scale.