FactCheck: the poor are taxed more heavily than the rich, says Nick Clegg
Updated on 17 July 2008
The Lib Dem leader claims the poor are taxed more heavily than the rich - but is he telling the whole story?
The claim
"People on low incomes still pay a much higher proportion of their incomes in tax than those on higher incomes."
Nick Clegg, Lib Dem leader, Today, BBC Radio 4, 17 July 2008
The background
The party that has previously pledged a higher basic rate and a top 50p rate of income tax seems an unlikely candidate to fill the tax-cutting vacuum left by David Cameron's "let's-match-Labour-spending-plans" Tories.
But in a new policy document out today, the Lib Dems called for tax cuts for "ordinary families".
Party leader Nick Clegg lambasted Labour on the radio this morning for taxing the poor more than the rich, and asked in a speech to launch the proposals, "how can it be fair that the poorest pay the highest portion of their income in tax?"
It's a line the Lib Dems have rolled out many times before, but is it that simple?
The analysis
According to Office of National Statistics figures, the richest 20 per cent of the population - on the basis of household equivalised (weighted for the size of the household) disposable income - pays 34.8 per cent of their income in tax. The poorest pays 38.6 per cent.
Which sounds pretty clear-cut: it's a greater proportion. But as with so many statistics to slide under the FactCheck microscope, there's more to it than that.
Those at the very bottom of the scale earn so little they pay no direct tax at all, but that's not the root of the claim complexity.
Firstly, let's break down where the taxes come from. Direct taxes such as income tax and national insurance are (with the exception of council tax and Northern Ireland's rates) progressive: the richer pay a greater proportion of their income than the poorer.
For the richest 20 per cent, direct taxes take 24.8 per cent of their income; for the poorest 20 per cent, it's just 10.9 per cent.
Tax doesn't operate alone as a funnel sucking up cash with no return, even if it feels that way when faced with a depleted payslip.
Indirect taxes, however - the likes of VAT, alcohol and tobacco duty and car tax - are regressive. Poorer people have less money to spend overall, and so these payments end up swallowing a greater proportion of their cash: 27.8 per cent for the bottom 20 per cent, and just 10.1 per cent for the richest.
Interestingly, as a proportion of expenditure, the difference is much less pronounced.
The richest households tend to shovel more of their money into savings accounts and mortgage payments, which aren't taxed indirectly, and many of the poorest households out-spend their income. That's either because they are borrowing money, or drawing on savings, particularly if their income is unsteady or has dipped temporarily.
This is worth bearing in mind because it shows the tax and income situation is more complex than Clegg's statement suggests. But he is talking about income rather than expenditure, so it doesn't detract greatly from his point.
What does render his argument far less convincing is the role of benefits. Tax doesn't operate alone as a funnel sucking up cash with no return, even if it feels that way when faced with a depleted payslip.
The figures for income include cash benefits, but what about "benefits in kind": free school meals, free healthcare and the rest of it? These tend to benefit the poorest more than the richest.
If you add gross income - earnings, cash benefits etc - to the value of these benefits in kind, the poorest pay 23.3 per cent of this total income in tax; the richest pay 33.1 per cent.
The verdict
It's perhaps a bit of a stretch to claim that the poorest families pay a "much" greater proportion of their income in tax; the difference is just under four percentage points.
This difference has widened, however, since the previous year's figures (when the poorest 20 per cent paid 36.4 per cent of their income in tax, and the richest paid 35.5 per cent) and since Labour came to power.
In 1997-98, the richest paid 35.3 per cent of their income in tax.; the poorest paid 37.8 per cent.
But if we look at the whole package of benefits, income, and benefits in kind, the poorest still end up better off in the tax stakes - proportionally - than the richest.
As the Labour government has effectively set great store on redistribution by stealth - tax credits rather than tax cuts, for example - it does make sense to look at this whole package to assess the real inequality situation.
FactCheck rating: 2.5
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The sources
ONS: the effects of taxes and benefits on household income 2006/07
ONS: the effects of taxes and benefits on household income 2005/06
ONS: the effects of taxes and benefits on household income 1997/98
Today programme
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