Friday, 8 October 2010

UK income distribution, FAIRNESS

We've heard much in the UK over the last few years about the inequality and unfairness in soceity. The Raven decided to look at some numbers because the political rhetoric as is often the case didn't match reality. Just looking at back of the envelope calculations some things didn't make sense. There has been much "taxpayer" outrage over bank bailouts (the fact that UKFI is actually breaking even on the bailouts is material for another post).

Wages; this is all earnt or income for a household, whether its derived from savings, self employment, salary, etc
Cash benefits; all cash payments directly from the government to the household
BIK; Benefits in kind; NHS, housing subsidy and travel subsidy
Other services; are the cost of the police force, army, government etc. The Raven's decided to allocate that evenly by household as its not obvious to him that any segment of soceity benefits more from it that one another, its clearly a cost so we must all be "enjoying" the benefit, even if it appears the ONS value this as zero.
Direct Taxes; VAT, fuel, etc
Vice Taxes; Tobacco, Alcohol and Gambling
Capital Taxes; Inheritence tax, Capital gains tax, dividend taxes, etc.

There are a few broad points to be made;
1) INEQUALITY, is nowhere near the levels thrown around by left wing commentators. They deliberatley exclude the value of services that soceity consumes and assume that these costs are magically absorbed by the tooth fairy. It seems contrived to be measuring income or household consumption to be only disposable income, when if one is even slightly unblinkered, it is very obious that households all enjoy police protection, the fire service the security of the army, etc. The Raven finds it outrageous that the ONS deliberately excludes these, but does include the NHS and housing benefits? by the ONS measure the lowest income household would have £18k and the highest income household £106k, whereas taking into account ALL services its £39k and £127k respectively. This is only half the story as obviously the government takes payments for these services so we should look at net income; in this case the numbers are £35k and £53k. How there is any uproar over inequality is amazing really. Especially when one cosiders the earned incomes were £5k and £101k.

2) As described before the majority of the population believes they are tax payers, and by this they believe net contributors, however looking at our numbers its pretty clear that only 25% of the population actually are net payers into the pot. The most disturbing indicator of the unsustainability of the system is looking at the middle of the distribution. A middle income house actually takes £15k more than it pays in tax, or to put that into budgetary numbers; £29bn. In fact subsidies of the middle half of the distribution total £117bn. A number not a million miles away from the current deficit of £150bn. To actually be a taxpaying household then one needs a household income of £48k.

It is very interesting that if one calculate the GINI index on earnings its 0.35, on ONS incomes 0.24, whereas taking into account services and actual tax paid its 0.05.

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